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ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Kestrel Ltd sub-lets a warehouse. Rent is $2,000 per month, payable quarterly in arrears on 31 January, 30 April, 31 July and 31 October. At the year end of 31 December, what adjustment is needed?

Accrued income of $4,000 should be recognised as a current asset. Rent for November and December has been earned but not yet received, so it is added to rent income for the year under the accruals concept.

  1. AAccrued income of $4,000 recorded as a current assetCorrect
  2. BDeferred income of $4,000 recorded as a current liability
  3. CAccrued income of $2,000 recorded as a current asset
  4. DNo adjustment, because rent is received in cash

Explanation

The 31 October payment covers August to October. Rent for November and December (2 x $2,000 = $4,000) has been earned but not received, so debit accrued income (receivable) and credit rent income. Deferred income would apply only to cash received in advance.

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