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Discy Latest Questions

  1. This answer was edited.

    In simple words, income received in advance is treated as a current liability because the income that has been received by the company before its due date, is not yet earned and the company is obliged to deliver the purchased goods or services in the future. Assume that you have received an amount fRead more

    In simple words, income received in advance is treated as a current liability because the income that has been received by the company before its due date, is not yet earned and the company is obliged to deliver the purchased goods or services in the future. Assume that you have received an amount from a customer, for the goods or services that you will provide in the future, therefore, in the current financial period it is a liability for your company. It can be referred to as Deferred revenue, Deferred income, or Unearned income.

    Example

    XYZ Ltd. has received 40,000 from a customer in March for goods that will be delivered in April.

    XYZ Ltd. will debit the Cash a/c for 40,000 and credit the Deferred Revenue a/c for 40,000. On the 31st of March, the balance sheet of XYZ Ltd. shall include 40,000 in the cash of their company and record the deferred revenue of 40,000 under current liabilities.

    The journal entries to be recorded are as follows:

    MarchCash a/c Debit40,000Debit the increase in asset
     To Deferred Revenue a/cCredit40,000Credit the increase in liability

    (being income received in advance)

    AprilDeferred Revenue a/cDebit40,000Debit the decrease in liability
      To Sales Revenue a/cCredit40,000Credit the increase in revenue

    (being  goods sold to the customer)

    Placement in the balance sheet

    (Extract of the balance sheet)

    balance sheet

    Hope this helps.

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  1. Meaning of Income received in advance It refers to an income received in advance by the entity for goods or services which have not been rendered in the current accounting period. The advance income received relates to the future accounting period. It is a personal account and presented on the liabiRead more

    Meaning of Income received in advance

    It refers to an income received in advance by the entity for goods or services which have not been rendered in the current accounting period. The advance income received relates to the future accounting period. It is a personal account and presented on the liability side of the balance sheet.

    Income received in advance includes-

    1. Commission received in advance
    2. Rent received in advance
    3. Professional fees received in advance
    4. Premium received in advance

    Taxable or not?

    Taxability of Income received in advance depends on the method of accounting (Accrual method or Cash method) followed by an entity.

    So, let me help you understand the taxability considering both the approaches with an example each.

    1. Entity follows accrual method

    If accrual system of accounting is followed then income received in advance will be not be taxed in the period of receipt. It will be taxed in the accounting period to which it relates.

    For Example,

    In the month of December 20×1, Mr. Michael received professional fees in advance 50,000 which relates to the month of January 20×2.

    So, in this case, professional fees received in advance 50000 will not be taxed in the accounting period Jan-Dec 20×1. It will be taxed in the period Jan-Dec 20×2, as it belongs to January 20×2.

    2. Entity follows cash method

    If cash system of accounting is followed then income received in advance will be taxed in the period of receipt itself.

    For Example,

    Ms. Alexa received commission in advance 25,000 in the month of December 20×5, but the same relates to the month of January 20×6.

    So, in this case, the commission received 25,000 will be taxed in the accounting period Jan-Dec 20×5 itself. Eventhough it relates to a future accounting period ie. Jan-Dec 20×6, it is of no concern here, as cash system of accounting is followed.

    Conclusion

    We can conclude,

    Method of accounting

    Period of taxability

    Accrual methodPeriod to which advance income relates
    Cash methodPeriod of receipt of advance income

     

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  1. This answer was edited.

    Before directly diving into the question asked-Is income received in advance a liability or an asset? I will make you equipped with the meaning of the word “Income received in advance”. Meaning of "Income received in advance" Income received in advance refers to an income that has been received by tRead more

    Before directly diving into the question asked-Is income received in advance a liability or an asset? I will make you equipped with the meaning of the word “Income received in advance”.

    Meaning of “Income received in advance”

    Income received in advance refers to an income that has been received by the entity in the current accounting period but it actually relates to the future accounting period. The entity has just received the income but has not earned it yet. It is also known as Unearned Income.

    The entity receiving the income in advance still has an obligation to render the goods or services in the next accounting period, corresponding to the income received. Only after the entity renders the goods or service, the transaction will be considered as complete. So, because of this reason, income received in advance is certainly considered to be a liability.

    As per the accrual system of accounting and to present the true and fair financial position of the entity, income received is to be recorded in the books of accounts, irrespective of when the actual goods or services are provided. So, income received in advance is recorded as a liability in the current accounting period.

    Income received in advance includes

    • Rent received in advance
    • Commission received in advance
    • Professional fees received in advance
    • Premium received in advance, etc.


    From the meaning of the word “Income received in advance” itself, we can conclude that it is a liability and not an asset.

    Treatment in Financial Statements

    Income received in advance is shown in both the Balance Sheet and Profit and Loss account.

    Financial StatementTreatment
    Profit and Loss accountReduced from the respective income on the credit side of profit and loss account
    Balance SheetPresented as a liability in the balance sheet under the head “Current Liabilities”

    A snippet of the balance sheet has been attached to show the presentation of Income received in advance.

    Income received in advance presented in balance sheet

    Conclusion

    Income received in advance is a liability and not an asset.

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