Skip to content

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

On 31 March, a firm has earned interest on investments for the last two months, but the interest will be received only in April. Which treatment is correct in the books for the year ending 31 March?

Interest earned but not yet received at year end is accrued income. It is added to the year's interest income and shown as a current asset, because the accrual basis recognises income when earned, not when cash is received.

  1. AIgnore the interest until it is received in April
  2. BRecord it as accrued income, shown as a current asset, and add it to interest incomeCorrect
  3. CRecord it as income received in advance, shown as a liability
  4. DDeduct it from interest income as a prepaid item

Explanation

Under the accrual basis, income earned but not yet received belongs to the current year. The adjustment credits interest income and debits accrued interest, a current asset. Ignoring it breaches accrual, and treating it as received in advance reverses its nature.

Did you get it right without looking?

One question tells you little. A timed set on Adjustment Entries and Rectification of Errors shows your real accuracy, how long you take and where you lose marks.

Practise Adjustment Entries and Rectification of ErrorsFree diagnostic mock

More Adjustment Entries and Rectification of Errors questions