Assume a company is in the business of renting office space to tenants. In December, the company rented an office to a tenant. It has not yet received the rent payment for December, but it is confident that it will receive the money in January. It has not yet made any entry related to the December rent. Under accrual accounting, the company should make which of the following adjustments, if any, to its records, as of the end of December?
A) No adjustment is needed, since the rent has not been collected.
B) It should record an increase in assets, an increase in expenses, and a decrease in equity.
C) It should record an increase in assets, an increase in revenues, and an increase in equity.
D) It should record a decrease in liabilities, an increase in revenues, and an increase in equity.
E) It should record a decrease in liabilities, a decrease in expenses, and a decrease in equity.

Question

Quizplus · Accepted Answer

Under accrual accounting, revenue should be recorded when it is earned, regardless of when payment is received. The company has earned the rent revenue for December, even though it hasn't received payment yet. Therefore, the company should record an increase in assets (accounts receivable), an increase in revenue, and an increase in equity (retained earnings). The correct answer is Choice C.

Assume a Company Is in the Business of Renting Office