Accounting for Income Received in Advance
We will learn when a business records income as earned and when income is considered received in advance. We will also learn how to record income in the journal, including adjustments for income received in advance, 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 Received in Advance
Income is regarded as earned when goods or services has been provided, regardless of whether payment is received.
Income is regarded as received in advance when a payment is received in advance of the provision of goods or services. Therefore, income received in advance is a current liability to the business.
To calculate income received in advance:
- Calculate total income earned for the accounting period.
- Determine the total amount received for the accounting period.
- Amount received in excess of total income earned is regarded as income received in advance.
Adjusting for Income Received in Advance Brought Forward
Income received in the previous accounting period is carried forward to the next accounting period when the business provides the service it owes. At this point, the amount is no longer treated as a current liability and is recognised as income earned.
Therefore, the amount is transferred from the current liability account to the income account to record the income for the current year, as the service has now been provided.
Dr Income received in advance
Cr Income
Recording Income Received in Advance
1. To record income received in advance brought forward
Dr Income received in advance
Cr Income
2. To record income received
Dr Cash at bank
Cr Income
3. To record income received in advance for the current period
Dr Income
Cr Income received in advance
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 received in advance on the first day of the accounting period
Refers to income received in the previous accounting period, for services to be delivered in the current period.
Cash at bank
Refers to income received via the bank account
Income received in advance on the last day of the accounting period
Refers to income received now for services to be provided only in the next accounting period
Income summary
Refers to total income earned in the current accounting period
Income Received in Advance 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 received in advance at the end of the current accounting period is recorded in the Statement of financial position as a Current Liability.