Rental income is earned by business entities for allowing another party to "use" the resources (assets) of the business entities. For example, letting of property, machinery, equipment & etc. An agreement is usually drafted and agreed by both parties. The terms agreed upon usually include the details or specifications of the assets, date of agreement, period, amount of rental e.g. per month. Many small businesses record rental income on cash basis, i.e. upon receipt. The double entry for recording rental income on cash basis is:- Balance Sheet Income Statement DR CR DR CR Cash at bank XXXX Rental income XXXX Example The financial period of ABC Co. Ltd. is from 1 January to 31 December. On 10 January 2006, XYZ Co. Ltd. agreed to rent Level 1 of a 3 levels shop owned by ABC Co. Ltd for 3 years commencing 1 March 2006 at $1,500 per month. 2 months rental and $500 utility deposit are collected by ABC Co. Ltd as security deposits. The following schedule shows the details of the money collected by ABC Co. Ltd. from XYZ Co. Ltd.:- Date Details $ 10-Jan-06 2 months rental as deposit 3,000 Utility deposit 500 25-Mar-06 March '06 rental 1,500 03-May-06 April '06 rental 1,500 20-Jun-06 May '06 rental 1,500 30-Aug-06 June '06 rental 1,500 July '06 rental 1,500 30-Nov-06 August '06 rental 1,500 September '06 rental 1,500 05-Dec-06 October '06 rental 1,500 05-Jan-07 November '06 rental 1,500 December '06 rental 1,500 January '07 rental 1,500 03-Apr-07 February '07 rental 1,500 17-Jun-07 March '07 rental 1,500 April '07 rental 1,500 May '07 rental 1,500 23-Aug-07 June '07 rental 1,500 July '07 rental 1,500 August '07 rental 1,500 12-Sep-07 September '07 rental 1,500 11-Oct-07 October '07 rental 1,500 03-Nov-07 November '07 rental 1,500 December '07 rental 1,500 January '08 rental 1,500 In the books of ABC Co. Ltd. The rental recorded in the accounts for the year ended 31 December 006 under cash basis of accounting comprised the following:- Date Details $ 25-Mar-06 March '06 rental 1,500 03-May-06 April '06 rental 1,500 20-Jun-06 May '06 rental 1,500 30-Aug-06 June '06 rental 1,500 July '06 rental 1,500 30-Nov-06 August '06 rental 1,500 September '06 rental 1,500 05-Dec-06 October '06 rental 1,500 TOTAL COLLECTED 12,000 The double entries for the recording of the rental deposit, utility deposit and the 8 months rental collected (March '06 to October '06) during the year ended 31 December 2006 are:- Balance Sheet Income Statement DR CR DR CR Cash at bank 3,500 Refundable deposits: 3,000 500 Balance Sheet Income Statement DR CR DR CR Cash at bank 12,000 Rental income 12,000 The following adjustment is required to recognise the 2 months rental receivable (November '06 and December '06):- Balance Sheet Income Statement DR CR DR CR Rental receivable 3,000 Rental income 3,000 The income statement and balance sheet of ABC Co. Ltd. before and after this adjustment for the recognition of 2 months rental are shown below to illustrate the impact of this adjustment:- Example of Income Statement and Balance Sheet of ABC Co. Ltd. Income Statement for the year ended 31 December 2006 BEFORE Adjustment AFTER DR CR $ $ Sales 109,270 109,270 Cost of Sales - 40,875 - 40,875 Gross profit 68,395 68,395 Other income: - Rental income 12,000 3,000 15,000 Operating expenses: - Accountancy fee - 800 - 800 Depreciation of property, plant and equipment - 2,500 - 2,500 Donation - 500 - 500 Electricity & water - 3,340 - 3,340 Insurance premium - 200 - 200 Printing & stationery - 1,697 - 1,697 Rental of premises - 12,000 - 12,000 Salaries - 27,865 - 27,865 Upkeep of office - 3,547 - 3,547 Telephone charges - 1,285 - 1,285 Travelling, petrol & toll charges - 2,648 - 2,648 - 56,382 - 56,382 Net profit for the year 24,013 27,013 Retained profits B/F 27,654 27,654 Retained profits C/F 51,667 54,667 Balance Sheet as at 31 December 2006 $ $ Non-current assets Property, plant and equipment 102,500 102,500 Current assets Inventories 5,000 5,000 Trade receivables 32,807 32,807 Other receivables, deposits & prepayments: Rental receivable - 3,000 3,000 Rental deposit 3,000 3,000 Utility deposit 500 500 Cash and bank balances 29,023 29,023 70,330 73,330 Current liabilities Trade payables - 3,588 - 3,588 Other payables and accruals - 102,575 - 102,575 - 106,163 - 106,163 Net current assets - 35,833 - 32,833 66,667 69,667 Financed by: - Share capital 15,000 15,000 Retained profits 51,667 54,667 66,667 69,667 For the financial year ended 31 December 2007, ABC Co. Ltd. would have recorded the following rental collected during the year ended 31 December 2007: - Date Details $ 05-Jan-07 November '06 rental 1,500 December '06 rental 1,500 January '07 rental 1,500 03-Apr-07 February '07 rental 1,500 17-Jun-07 March '07 rental 1,500 April '07 rental 1,500 May '07 rental 1,500 23-Aug-07 June '07 rental 1,500 July '07 rental 1,500 August '07 rental 1,500 12-Sep-07 September '07 rental 1,500 11-Oct-07 October '07 rental 1,500 03-Nov-07 November '07 rental 1,500 December '07 rental 1,500 January '08 rental 1,500 TOTAL COLLECTED 22,500 The double entry for the recording of these rental received during the year ended 31 December 2007 is as follows:- Balance Sheet Income Statement DR CR DR CR Cash at bank 22,500 Rental income 22,500 As the November 2006 and December 2006 rental collected should be recognised in the financial year ended 31 December 2006 and not 31 December 2007, the following correction journal adjustments are required:- Balance Sheet Income Statement DR CR DR CR Rental receivable 3,000 Retained profits 3,000 This journal entry is actually the same as the journal entry shown earlier to recognise the rental income in the financial year ended 31 December 2006. In the context of the financial statements of ABC Co. Ltd. for the year ended 31 December 2007, any adjustments made that affect the profit in earlier years, are now required to be adjusted to the retained profits brought. forward Balance Sheet Income Statement DR CR DR CR Rental income 3,000 Rental receivable 3,000 Reversal of January 2008 rental collected incorrectly recognised in the income statement of ABC Co. Ltd. for the year ended 31 December 2007 Balance Sheet Income Statement DR CR DR CR Rental income 1,500 Advance rental collected 1,500 The income statement and balance sheet of ABC Co. Ltd. before and after adjustment No. 1, 2 & 3 are shown below to illustrate the impact of these adjustments: - Example of Income Statement and Balance Sheet of ABC Co. Ltd. Income Statement for the year ended 31 December 2007 BEFORE Adjustment AFTER No. DR No. CR $ $ Sales 159,270 159,270 Cost of Sales - 90,875 - 90,875 Gross profit 68,395 68,395 Other income: - Rental income 22,500 2 3,000 18,000 3 1,500 Operating expenses: - Accountancy fee - 800 - 800 Depreciation of property, plant and equipment - 2,500 - 2,500 Donation - 500 - 500 Electricity & water - 3,340 - 3,340 Insurance premium - 200 - 200 Printing & stationery - 1,697 - 1,697 Rental of premises - 12,000 - 12,000 Salaries - 35,579 - 35,579 Upkeep of office - 3,547 - 3,547 Telephone charges - 1,285 - 1,285 Travelling, petrol & toll charges - 2,648 - 2,648 - 64,096 - 64,096 Net profit for the year 26,799 22,299 Retained profits B/F 51,667 1 3,000 54,667 Retained profits C/F 78,466 76,966 Balance Sheet as at 31 December 2007 $ $ Non-current assets Property, plant and equipment 100,000 100,000 Current assets Inventories 5,200 5,200 Trade receivables 6,000 6,000 Other receivables, deposits & prepayments: Rental receivable - 1 3,000 2 3,000 - Rental deposit 3,000 3,000 Utility deposit 500 500 Cash and bank balances 52,652 52,652 67,352 67,352 Current liabilities Trade payables - 3,588 - 3,588 Other payables and accruals: Other payables - 70,298 - 70,298 Advance rental collected - 3 1,500 - 1,500 - 73,886 - 75,386 Net current assets - 6,534 - 8,034 93,466 91,966 Financed by: - Share capital 15,000 15,000 Retained profits 78,466 2 3,000 1 3,000 76,966 Note 1 3 1,500 93,466 91,966 Note 1: All adjustments affecting the income statements have to be repeated again and shown as adjustments to the retained profits account in the balance sheet. This is because all adjustments affecting any income statement items and the retained profits brought forward will eventually be included in the retained profits carried forward to the next financial year.
Friday, 18 January 2008
Various Types of Transactions – Part 4c, Collection from Other Source of Revenue and Income (Rental Income)
Rentals
Utility
Recognition November '06 and December '06 rental
Correction of rentals incorrectly recognised during the financial year ended 31 December 2007
Reversal of rental income incorrectly recognised in the income statement of ABC Co. Ltd. for the year ended 31 December 2007 and rental receivable
In addition, the rental of January 2008 collected on 3 November 2007 should only be recognised as rental income in the financial statements for the year ended 31 December 2008. The following correction journal adjustment is required:-
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment