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

Zeta Co has a year end of 31 December 2025. On 1 October 2025 it let a warehouse to a tenant for 12 months at 48,000 payable annually in advance on 1 October. The tenant paid 48,000 on 1 October 2025 and Zeta Co credited all of it to rental income. Opening balances relating to rent are nil. What adjustment is required at 31 December 2025?

Nine months of the 12-month rent, 36,000, is not yet earned at the year end. Zeta Co should debit rental income and credit deferred income with 36,000, leaving 12,000 as income for the three months actually earned in 2025.

  1. ADebit rental income 36,000; credit deferred income 36,000Correct
  2. BDebit rental income 12,000; credit deferred income 12,000
  3. CDebit deferred income 36,000; credit rental income 36,000
  4. DDebit rental income 36,000; credit accrued income 36,000

Explanation

Rent of 48,000 covers 12 months, so 4,000 per month. By 31 December only 3 months (12,000) is earned; 9 months (36,000) relates to 2026 and is a liability (deferred income). Debit income 36,000, credit deferred income 36,000. Option B deducts only the earned amount, and option D wrongly treats it as accrued income, an asset.

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