Accounting for Income Receivable
We will learn when a business records income as earned and when income is considered receivable. We will also learn how to record income in the journal, including adjustments for income receivable, and how to interpret an income account.
The income account covered in this lesson is used to record other income earned by the business and does not include the sales revenue account of a trading business.
Related Lessons:
Determining Income Receivable
Income is regarded as earned when goods or services has been provided, regardless of whether payment is received.
Income is regarded as owing or receivable when goods or services has been provided but payment was not received. Therefore, income receivable is a current asset to the business.
To calculate income receivable:
- Calculate total income earned for the accounting period.
- Determine the total amount received for the accounting period.
- Amount earned in excess of the total amount received is regarded as income receivable.
Adjusting for Income Receivable Brought Forward
Income owing in the previous accounting period is carried forward to the next accounting period for payment to be received. At this point, the amount is no longer treated as a current asset.
Therefore, the amount is transferred from the current asset account to the income account so that the total income for the year are reduced, as this amount was not actually an income of the current period
Dr Income
Cr Income receivable
Recording Income Receivable
1. To record income receivable brought forward
Dr Income
Cr Income receivable
2. To record income received
Dr Cash at bank
Cr Income
3. To record income receivable for the current period
Dr Income receivable
Cr Income
4. To close the income account
Dr Income
Cr Income summary
Interpreting Income Account
The following transactions in the income account are interpreted as such:
Income receivable on the first day of the accounting period
Refers to income owing in the previous accounting period, payment to be received in the current period.
Cash at bank
Refers to income received via the bank account
Income receivable on the last day of the accounting period
Refers to income owed and are to be received in the next accounting period
Income summary
Refers to total income earned in the current accounting period
Income Receivable in the Financial Statements
Amount transferred from the income account to the Income Summary account is recorded in the Statement of financial performance as an Other Income.
The amount of income receivable at the end of the current accounting period is recorded in the Statement of financial position as a Current Asset.