Accounting for Accruals

3.3. Interest revenue accrual transaction analysis

Event No. 7 in the table shown earlier is the adjusting entry to recognize accrual of interest. The amount is computed by multiplying the face value of the CD by the interest rate by the length of time for which the loan was outstanding:

$1,000 x 6% x (8 ÷ 12) = $40

After all adjusting entries are recorded, it is time to look at the financial statements for Candely Services for the accounting period 20X7.

3.4. Financial statements for the second illustration of accrual accounting

Illustration 13: Income statement for Candely Services for 20X7

Candely Services
Income Statement
For the Period Ended 20X7



Consulting Revenue

$ 2,700

Interest Revenue


Total Revenue




Salary Expenses




Net Income


There is a new element called interest revenue in the income statement. The interest revenue is the amount we recognized by posting the adjusting entry on December 31, 20X7.

Illustration 14: Statement of changes in equity for Candely Services for 20X7

Candely Services
Statement of Changes in Equity
Period Ended 20X7



Contributed Capital

$ 3,500



Beginning Retained Earnings


Plus: Net Income


Less: Distribution


Ending Retained Earnings




Total Equity

$ 5,640

While looking at the statement of changes in equity, note that there was a cash distribution to the owner ($500) in this accounting period.

Illustration 15: Balance sheet for Candely Services at 20X7 end

Candely Services

Balance Sheet

For the Period Ended 20X7




$ 4,800

Accounts Receivable


Interest Receivable


Certification of Deposit


Total Assets






Salaries Payable


Total Liabilities






Contributed Capital


Retained Earnings


Total Equity




Total Liability and Equity (Claims)


There are two new elements appear on the balance sheet. Interest receivable is the amount due from the borrower of funds (i.e., from the bank) for using Mr. Candely's money (i.e., the certificate of deposit). Certificate of deposit represents the initial amount loaned to the bank that will be returned at the maturity date (April 30, 20X8).

Illustration 16: Statement of cash flows for Candely Services for 20X7

Candely Services
Statement of Cash Flows
For the Period Ended 20X7

Cash Flows from Operating Activities


Cash Receipts from Customers

$ 3,000

Cash Payments for Expenses


Net Cash Flow from Operating Activities




Cash Flows from Investing Activities


Cash Payment to Purchase CD


Net Cash Flow from Investing Activities




Cash Flows from Financing Activities


Cash Payments for Distributions


Net Cash Flow from Financing Activities




Net Increase in Cash


Plus: Beginning Cash Balance




Ending Cash Balance

$ 4,800

In the statement of cash flows, two new elements are introduced. The first is the cash outflow that occurred as a result of purchasing the certificate of deposit. This is a cash flow for investing activities. The second represents the cash outflow for distributions to the owner, which is an example of financing activities.

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