Everything Bikes is owed $550 rent which has not been received by 3l December 2018, the last day of the accounting period. The adjusting entry on that date is:
A) DR Bank $550; CR Rent income $550
B) DR Accounts receivable $550; CR Rent income $550
C) DR Rent income $550; CR Accounts receivable $550
D) DR Rent expense $550; CR Accrued Rent $550

Question

Quizplus · Accepted Answer

According to the accrual accounting principle, revenue should be recognized when earned, not necessarily when cash is received. Since Everything Bikes is owed $550 in rent that has not been paid by the end of the accounting period, it should be recorded as Accounts Receivable, an asset account. To adjust for this, the entry should be DR Accounts Receivable $550 and CR Rent income $550. This will ensure that Everything Bikes’ income statement reflects the revenue earned, even though the cash has not yet been received. Option A is incorrect because the company has not received the cash yet. Option C is incorrect because in a cash accounting system, revenue is recorded only when paid, not when earned. Option D is incorrect because rent expense is not relevant in this scenario, and accrued rent would be a liability account, not an expense account.

Everything Bikes Is Owed $550 Rent Which Has Not Been