Sign In

For the sake of quality, our forum is currently "Restricted" to invitation-only. In case if you wish to join our forum, please send an email seeking an invitation to "[email protected]".

Forgot Password

Lost your password? Please enter your email address. You will receive a link and will create a new password via email.

Captcha Click on image to update the captcha.

You must login to ask question.

Sahil

Is Income received in advance taxable?

Share

1 Answer

  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 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

     

    • 0

Leave an answer