Sahil In: Category - Revenue or IncomeIs Income received in advance taxable?income received in advancetaxtaxable ShareFacebook1 AnswerVotedRecent Vaishnavi 2020-07-29T22:31:23+05:30Added an answer on July 29, 2020 at 10:31 pm Meaning of Income received in advanceIt 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 advanceTaxable 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 methodIf 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 methodIf 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.ConclusionWe can conclude,Method of accountingPeriod of taxabilityAccrual methodPeriod to which advance income relatesCash methodPeriod of receipt of advance income 0Reply Share ShareShare on FacebookShare on TwitterShare on LinkedInShare on WhatsAppLeave an answerCancel replyYou must login or register to add a new answer.