Such an income that has not been earned as yet but has been received in advance is called Unearned Income. It doesn’t belong to the current financial year but has been received in advance. Any unearned income received depicts a false image of the profitability of the business and hence requires an adjustment to nullify the effect.
Adjustment:
A. If Unearned Income is given outside the trial balance: In such cases, two entries will be passed:
- Will be deducted from the related Income A/c in the Cr. side of the Profit & Loss A/c
- Will be shown in the Liabilities side of the Balance Sheet.
B. If Unearned Income is given inside the trial balance: It will only be shown on the Liabilities side of the Balance Sheet.
Illustration:
The Trial Balance of Ms. Samriti for the year ended March 31 2023, appears as follows:
The following adjustments were noted on that date:
1. Rent received in advance amounts to ₹3,000.
2. Amount of Closing stock on 31st March 2022 was ₹15,000.
3. Outstanding wages amounting to ₹500.
4. Salary paid in advance amounting to ₹5,000.
5. Commission amounting to ₹1,500 is still to be received.
Prepare Trading and Profit and Loss A/c and balance sheet after taking the following adjustments into consideration.