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CMA Foundation · Fundamentals of Financial and Cost Accounting · Adjustment Entries and Rectification of Errors

At year end, a firm wrongly treated Rs 8,000 of rent received in advance as income earned. The adjusting entry made at year end to correct this should be:

Debit Rent Account and credit Rent Received in Advance by Rs 8,000. This reduces the overstated rent income of the current year and records a liability for the amount that belongs to the next period.

  1. ADebit Rent Received in Advance Rs 8,000; credit Rent Account Rs 8,000
  2. BDebit Rent Account Rs 8,000; credit Rent Received in Advance Rs 8,000Correct
  3. CDebit Accrued Rent Rs 8,000; credit Rent Account Rs 8,000
  4. DDebit Cash Rs 8,000; credit Rent Account Rs 8,000

Explanation

Rent income was overstated by Rs 8,000, so rent account is debited to reduce it. The credit creates a liability, rent received in advance. Option 1 would increase income further, and accrued rent would wrongly create an asset.

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