Adjusting Accounting Question 3?

The debit to the revenue account removes the revenue that was recorded but has not been earned yet. (Most companies will put such prepayments into a liability account called 'Unearned Revenue' at first, and then transfer appropriate amounts to a Revenue account as revenues are actually earned.) This company chose to record the entire prepayment as revenue immediately, which is not the best way to do it, in my opinion, but it is a valid 'alternate way'.

As of Dec 31, five months of rent have been 'used up', i.e., earned.

(August, September, October, November, December)

The monthly rent is ($ 27,000 / 6) = $ 4,500

Rent revenue actually earned was hence (5 x $ 4,500) = $ 22,500

That remaining one month of prepaid rent ($ 4,500) is still a prepayment and hence a liability to the company that received the prepayment.

Again, the entire prepayment was recorded as revenue but has not been entirely earned yet, for that last one month of rent. Hence you have to adjust that by transferring one month of rent from 'Rent Revenue' to the liability account 'Unearned Rent Revenue', via the entry

Debit 'Rent Revenue' $ 4,500

Credit 'Unearned Rent Revenue' $ 4,500

First, Revenue accounts usually have a credit balance. Inappropriate usage of Revenue Account debiting will set-off the auditor’s bells and whistles. Debiting a revenue account will reduce the overall balance of the revenue account and may understate tax liability. With that being said, Actuarial Accounting will commonly employ this methodology in some rather ordinary circumstances. Some debit entries for revenue include customer returns, sales discounts or fiscal revenue deferrals.

Here’s your situation… Fiscal Revenue Deferrals- Deferred revenue (or deferred income) is a liability, such as cash received from a counterpart for goods or services that are to be delivered in a later accounting period. When such income item is earned, the related revenue item is recognized, and the deferred revenue is reduced.