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UNEARNED INCOME OR INCOME RECEIVED IN ADVANCE

It is just possible that we may receive the income of the next year during the current year. Such income is also known as unearned, because the income has not been earned by the current year. It relates to the next – year, though received during the current year. It will be deducted from concerned income at the credit side of profit and loss account and also shown as a liability. 

Treatment in Final Accounts

(i) If unearned income appears in the adjustment. All the items appearing in the adjustments are shown at two places, so unearne4 income will also be shown at two places. Unearned rent amounting to $ 15,000 referred to in the above example will be deducted from the rent at the credit side of profit and loss account and also shown at the liabilities side. The treatment of this rent received in advance will be made in the profit and loss account and the Balance sheet as under :

Profit and Loss Account                                                                     Balance Sheet

As on December 31, 2003

Rent received account is debited, so it will reduce the amount of rent received at the credit side of profit and loss account. Unearned rent account shows a credit balance so it will be shown at the liabilities side (liabilities have credit balance).

(ii) If  unearned income appears in Trial balance. Appearing in the Trial balance means that it has been routed through double entry record (journal entries have already been passed for it) so it will be shown only at one place. That only place for it will be the liabilities side, simply because it shows a credit balance and the amount received in advance has to be paid by the current year to the next year.