- Interest Income (Accrued)
- Interest Income
The credit part is posted immediately, thereby showing an addition to the income already recorded as earned during the current period. The debit part is posted after the current account is adjusted and allowance made for the closing transfer entry to Profit and Loss. The debit part of the adjusting entry is then entered on the debit side of the new portion of the account. Assume this debit item to be $50, and the interest received during the next period to be $170. The new account will indicate a credit balance of $120, which is the amount actually earned during that period, since the previous period took credit for the $50 accrued or earned during that period.
Deferred Expenses.—When a part of the expense paid during the current period applies to the next period, the prepaid portion must be taken out of the current expenses and held over—deferred—as a charge to the expenses of the next period. Taking insurance as an example, the following journal entry effects the required adjustment:
- Insurance (Deferred)
- Insurance
In posting this entry, the credit part is posted first in order to take out of the excessive cost shown chargeable to this period the portion equitably belonging to the next period. When this is done, the debit balance of the Insurance account indicates the amount to be charged to the current period and is the correct charge against the Profit and Loss for the period. After making allowance for the space needed for closing the account, the debit side of the above entry is posted, this debit becoming the first charge in the account for the next period. Note that the use of the bracketed “Deferred” is as a guide in posting. It indicates that that portion of the entry is not to be posted until provision has been made for closing the account. After posting is completed, the Insurance account appears as follows:
| Insurance | |||
| Jan. 2 | 125.00 | Dec. 31 | 200.00 |
| Apr. 10 | 250.00 | ||
| Aug. 15 | 300.00 | ||
| 675.00 | |||
| Jan. 1 | 200.00 | ||
There remains, of course, the transfer to Profit and Loss of the current balance before the account is closed. This closing work is treated later in the chapter.
Accrued Expense Items.—These items cover expenses which the business has incurred but has not yet paid, and which are properly chargeable to this period but have not yet been charged on the books. For instance, salaries earned up to the close of the period but not paid at its close constitute an additional charge to the period’s operations which must be entered on the books before they will show true conditions. This amount also constitutes a liability of the business. Accordingly, the journal entry is:
- Salaries
- Salaries (Accrued)
thus charging the Salaries account with the amount due but not paid, and bringing this amount down as a credit balance to the new account for the next period. Assuming this unpaid amount to be $72, the account after closing will show this $72 as a liability on the closing date. Its effect, however, during the next period will be to reduce the amount charged to salaries during that period, because this $72, although paid during that period, has already been charged to the previous period.