Unearned income

Unearned income Or Income received in advance

Sometimes income is received before it becomes actually due. Such income is called “unearned income” or “income received in advance”.

Or

Unearned Income refers to an income, which has been received in advance.

In the other words-Income related to next accounting period but received in current year called unearned income or income received in advance.   It is the income which has been received in advance but against it either sale is yet to be made or service is yet to be rendered. Such income is also known as Income not due but received or Income received but not earned. For example, Unearned Interest, Commission received in advance, etc. 

Since this income does not relate to the accounting year, it should be deducted from the relevant head of income account on the credit side of income statement. It is a liability of the business enterprise and hence is shown in the liability side of the Balance Sheet as a seprate item under current liabilities. 

Accounting entry for Unearned income

Or 

Income received in Advance

Or

Income received but not earned

Or

Income not due but received

1.  At the time of income received in advance-

Cash/Bank  A/c Dr

To Income Received  A/c

(Income received in advance)

2. At the end of  the financial year-

Income Received A/c Dr

To Income Received in Advance A/c

(Income receivable next year adjusted with income received in advance account)

3. At the beginning  of  the financial year-

Income Received in advance  A/c Dr

To Income Received  A/c

(Income matched to each period)

Also read : Accrued Income journal Entry

Example

Unearned Rent Accounting Treatment

On March 25th 2020 X Company-A receives $600,000 ($50,000 x 12 months) as rent in cash which belongs to the next financial year (April 2020 to March 2021). Books are closed every year 31st March.

Pass journal entries in the books of company (Including journal entry for income received in advance on these dates;

  1. March 25 th 2020 (Same Day)
  2. March 31 st 2020 (End of the period adjustment)
  3. April 1st 2020 to March 31st 2021 (Beginning of each month next year 2020-2021)

1.March 20th 2020 –  (At the time of Rent received in Advance)

Unearned rent received

2. March 31st 2020(At the time of Adjustment of Rent received in Advance)

Adjustment of unearned rent

3. April 1st 2020 to March 31st 2021 (Income matched to each Month)

Adjustment of unearned rent at beginning of every month

 

Note:

1. This Journal Entry will be passed in the books of company at the beginning of each months April ’2020 to March ’2021

2. All 12 months from April ’2020 to March ’2021 will be consumed in each period against the rent received in advance account to reduce the advance account to zero by end of the year.

ACCOUNTING TREATMENT IN FINAL ACCOUNTS-

  1. In final accounts  “unearned income” or “income received in advance” is Reduces it from the concerned income head on the credit side of the income statement.
  2. n final accounts “unearned income shown in the liability side of the Balance Sheet as a seprate item under current liabilities

Question for Practice-

Question 1.

Unearned Rent Accounting Treatment

On March 15th 2020 X Company-A receives $300,000 ($25,000 x 12 months) as rent in cash which belongs to the next financial year (April 2020 to March 2021). Books are closed every year 31st March.

Pass journal entries in the books of company (Including journal entry for income received in advance on these dates;

  1. March 15 th 2020 
  2. March 31 st 2020 
  3. April 1st 2020 to March 31st 2021 

Question 2.

Unearned Rent Accounting Treatment

On December 15th 2020 X Company-A receives $300,000 ($25,000 x 12 months) as rent in cash which belongs to the next financial year (January 2021 to December 2021). Books are closed every year 31st December.

Pass journal entries in the books of company (Including journal entry for income received in advance on these dates;

  1. December 15 th 2020 
  2. December 31 st 2020 
  3. January 1st 2021 to December 31st 2021 

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