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Income Received in Advance or Unearned Income


Sometimes an amount is received during a year in respect of an income that relates partially to the next year. The income which has been received during the current accounting year but relates to the next accounting year is called 'Unearned Income' or 'Income Received in Advance'. Adjusting entry for the income received in advance is as follows:
Income A/c Dr.
To Income Received in Advance A/c

 

When the income received in advance is shown in the Trial Balance, it means that the adjusting entry is already passed. In such a situation, income received in advance is shown only in the Balance Sheet as a liability.

 

Example 4 - Rent received during the accounting year is Rs. 36,000 including Rs. 6,000 for the next accounting period.

 

In this case, the rent of Rs. 6,000 relates to next year and thus, should be credited to the Profit and Loss Account of that year. This will ensure that the income for the current year is not overstated. This requires the following adjusting entry:

 

Rent Received A/c Dr. Rs. 6,000
To Rent Received in Advance A/c Rs. 6,000

 

Rent Received in Advance

Dr.     Cr.

Particulars

Rs.

Particulars

Rs.

To Balance c/d

6,000

 

_____

6,000
--------

By Rent Received A/c

6,000

 

______
6,000
---------

 

Rent Received

Dr.     Cr.

Particulars

Rs.

Particulars

Rs.

To Rent Received in Advance A/c

To Profit & Loss A/c

6,000

 

30,000

 

___________

5,000
-------------

By Bank

36,000

 

 

________
36,000
------------

 

Profit and Loss Account

Dr.     Cr.

Particulars

Rs.

Particulars

Rs.

  ________

By Rent received 36,000

Less: Advance 6,000

                 ------------

 

 

 

 

30,000

 

Balance Sheet

Liabilities

Assets

Rent Received in Advance 6,000

 

 

Rent received in the Advance Account will be transferred to the Rent Account next year.

 

This principle should be applied to all incomes which pertain wholly or partially to the next year. Other examples can be the premium received from apprentices or subscription received for a magazine. The premium applicable to the period after the close of the accounting year or the subscription for copies, to be supplied after the end of the year, should be credited to unearned income account by debiting it to the account of the apprentice premium or the subscription. This will ensure that the income for the current year is not overstated.




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