Accrued Income vs Income Received in Advance: Both Effects

You finish a commission assignment in March. The customer pays in April. Which year’s income is it?

Now turn the situation around. Someone pays you in March for a service you will provide in April. Does receiving the money make it March’s income?

These two questions are the heart of accrued income and income received in advance. The dates of earning and receiving money can be different. Final accounts need you to notice that difference and give it two effects.

For a simple year-end adjustment, accrued income increases income and creates an asset. Income received in advance reduces income already recorded and creates a liability. The second rule assumes the original receipt was credited to the income account. We will also work through the alternative where it was recorded as a liability from the beginning.

Start with the earning date

Accrued income is income earned by the reporting date but still unreceived. Income received in advance is money already collected for income that belongs to a later period.

In the usual final-accounts question, rent, commission and investment interest appear on the credit side of the Profit and Loss Account. An unrecorded accrual is added to the relevant income; an unearned amount included in that income is deducted. The corresponding balances appear as an asset and a liability respectively. This is the treatment explained in NCERT’s Financial Statements II, sections 9.5 and 9.6.

Imagine two little gardens. One has already flowered, but the collection bowl is empty. The other has a full bowl, but its flower is still a bud. The first resembles accrued income; the second resembles an advance. The money and the work have arrived in a different order.

The two-effect comparison

Use this table when the amounts are given as additional adjustments that have not yet been recorded.

Question	Accrued income	Income received in advance
Earned by year-end?	Yes	Not yet
Money received?	No	Yes
Income adjustment	Add the unrecorded amount	Deduct the unearned amount included in income
Balance Sheet effect	Asset	Liability
Adjustment debit	Accrued income account	Relevant income account
Adjustment credit	Relevant income account	Income received in advance account

Do not let the word “income” make both balances look like revenue. “Accrued Commission” is a separate asset account; “Commission Received in Advance” is a separate liability account. The Commission Account reports the amount earned during the year.

For the short-term examples below, the asset and liability are current items. All figures are in rupees, and the financial year ends on 31 March unless another date is stated.

Example 1: Commission earned but not received

Mira’s trial balance shows Commission Received of Rs 28,400. An additional note says commission of Rs 3,600 has been earned but remains unreceived at year-end. This amount has not been recorded.

The Rs 28,400 is already in the income account. The missing Rs 3,600 belongs to the same year.

Adjustment on 31 March:

• Accrued Commission A/c Dr. Rs 3,600
• To Commission A/c Rs 3,600

Narration: Being commission earned during the year but not yet received recorded.

Effect 1, Profit and Loss Account:

Commission income = Rs 28,400 + Rs 3,600 = Rs 32,000.

Effect 2, Balance Sheet:

Show Accrued Commission Rs 3,600 among current assets.

Here is a useful self-check: Mira has earned Rs 32,000. Of that, Rs 28,400 has arrived and Rs 3,600 remains to be collected. Those two pieces explain the entire income figure.

If you record only the asset, the income account remains too low. If you record only the income, the accounts fail to show the amount still receivable. Writing both effects keeps the story complete.

Example 2: Rent collected for next year

Kabir’s Rent Received Account has a credit balance of Rs 78,000. This includes Rs 12,000 for April and May following the reporting date. All receipts were originally credited to Rent Received.

The business has collected the Rs 12,000, but the rental period has not yet happened.

Adjustment on 31 March:

• Rent Received A/c Dr. Rs 12,000
• To Rent Received in Advance A/c Rs 12,000

Narration: Being rent relating to the following year transferred to rent received in advance.

Effect 1, Profit and Loss Account:

Rent income = Rs 78,000 - Rs 12,000 = Rs 66,000.

Effect 2, Balance Sheet:

Show Rent Received in Advance Rs 12,000 among current liabilities.

Nothing in this adjustment removes money from the bank. Kabir still holds the cash. What changes is how much of the receipt can be treated as this year’s income.

Example 3: Count the rental months before calculating

A shop receives Rs 42,000 on 1 January for six months of rent covering January to June. The entire receipt is credited to Rent Received. Accounts close on 31 March.

First find the monthly amount:

Rs 42,000 / 6 = Rs 7,000 per month.

Then split the covered period:

• January, February and March belong to the current year: 3 months.
• April, May and June belong to the next year: 3 months.

Therefore:

• Rent earned this year = Rs 7,000 x 3 = Rs 21,000.
• Rent received in advance at 31 March = Rs 7,000 x 3 = Rs 21,000.

Debit Rent Received and credit Rent Received in Advance by Rs 21,000. The remaining income balance is Rs 21,000.

Now change just one fact: suppose the same Rs 42,000 covers February to July. There are only two earned months by 31 March. Income becomes Rs 14,000 and the advance becomes Rs 28,000. The receipt date alone cannot tell you the answer; you need the period the payment covers.

Example 4: Interest earned for only part of a year

A business lends Rs 1,50,000 on 1 December at 8% per annum. Interest is payable on the following 30 November. No interest has been received or recorded by 31 March.

The business is the lender, so this is interest income. December to March gives four months of interest:

Interest accrued = Principal x Annual rate x Months / 12

= Rs 1,50,000 x 8/100 x 4/12

= Rs 4,000.

The adjustment is:

• Accrued Interest A/c Dr. Rs 4,000
• To Interest Income A/c Rs 4,000

Show Rs 4,000 as income in the Profit and Loss Account and Rs 4,000 as accrued interest under current assets. The loan principal of Rs 1,50,000 remains a separate asset; the interest calculation does not reduce it.

The contractual payment date is later, but four months of earning have already passed. Accrued interest need not already be overdue.

If the business had borrowed the money instead, the same arithmetic would measure its interest expense. Before deciding on an entry, underline whether the business lent or borrowed.

Why Cash or Bank is absent from these adjustments

The year-end entries above update income and an asset or liability. They do not record a fresh receipt. For accrued income, cash has not arrived. For an advance already included in income, the cash receipt was recorded earlier.

OpenStax’s lesson on adjusting entries explains the distinction between accrued revenue and unearned revenue, including recognition of income as it is earned.

Compare two dates in Mira’s commission example:

31 March, earning recognised:

• Accrued Commission A/c Dr. Rs 3,600
• To Commission A/c Rs 3,600

15 April, customer pays the receivable:

• Bank A/c Dr. Rs 3,600
• To Accrued Commission A/c Rs 3,600

The April receipt clears the asset. It does not earn the same commission again. These entries assume the March adjustment was retained and no reversing entry was passed.

If you credit Commission again on 15 April under this method, the same Rs 3,600 appears as income in two years.

What if the advance was originally recorded as a liability?

Always inspect the first entry. An advance can be recorded initially in an unearned income account, with the earned portion transferred to income later. The alternative-procedure discussion in Principles of Accounting shows why both initial recording methods can reach the same final balances.

Consider a tutor who receives Rs 24,000 on 1 February for four equal months of lessons, February to May. Assume lessons are delivered evenly and all scheduled lessons through March have been completed.

The earned portion by 31 March is Rs 12,000, and the remaining advance is Rs 12,000.

Method A: Receipt initially credited to Fees Income

On 1 February:

• Bank A/c Dr. Rs 24,000
• To Fees Income A/c Rs 24,000

On 31 March, remove the unearned half:

• Fees Income A/c Dr. Rs 12,000
• To Fees Received in Advance A/c Rs 12,000

Closing result: Fees Income Rs 12,000; advance liability Rs 12,000.

Method B: Receipt initially credited to Fees Received in Advance

On 1 February:

• Bank A/c Dr. Rs 24,000
• To Fees Received in Advance A/c Rs 24,000

On 31 March, recognise the earned half:

• Fees Received in Advance A/c Dr. Rs 12,000
• To Fees Income A/c Rs 12,000

Closing result: Fees Income Rs 12,000; advance liability Rs 12,000.

The adjustments go in opposite directions because their starting balances are different. Both finish in the same place.

Example 5: Both adjustments in one set of final accounts

A small business provides these unadjusted figures:

• Gross profit: Rs 1,80,000.
• Salaries: Rs 64,000.
• Office expenses: Rs 26,000.
• Commission received: Rs 22,000.
• Rent received: Rs 54,000.

Additional information:

1. Commission of Rs 4,500 has been earned but is unrecorded and unreceived.
2. Rent received includes Rs 9,000 for next year.

Working note 1: Commission

Rs 22,000 + Rs 4,500 = Rs 26,500.

Working note 2: Rent

Rs 54,000 - Rs 9,000 = Rs 45,000.

Profit and Loss Account extract

Particulars	Amount (Rs)
Gross profit	1,80,000
Add: adjusted commission	26,500
Add: adjusted rent income	45,000
Total before expenses	2,51,500
Less: salaries	64,000
Less: office expenses	26,000
Net profit	1,61,500

The Balance Sheet separately includes Accrued Commission Rs 4,500 as an asset and Rent Received in Advance Rs 9,000 as a liability. These are extracts, not a complete Balance Sheet, because the other asset and capital balances have not been supplied.

Check the profit movement

Before adjustments, profit would be:

Rs 1,80,000 + Rs 22,000 + Rs 54,000 - Rs 64,000 - Rs 26,000 = Rs 1,66,000.

The accrual adds Rs 4,500. The advance removes Rs 9,000. The net reduction is Rs 4,500:

Rs 1,66,000 + Rs 4,500 - Rs 9,000 = Rs 1,61,500.

This second route checks the final answer without repeating the whole account.

What if the item appears inside the trial balance?

Do not record an adjustment twice.

Suppose an adjusted trial balance contains Commission Income Rs 32,000 and Accrued Commission Rs 3,600. These are the closing balances from Example 1 after the entry has been posted.

Transfer Rs 32,000 to the Profit and Loss Account and show Rs 3,600 as an asset. Adding Rs 3,600 to commission again would incorrectly report Rs 35,600.

Likewise, an adjusted trial balance containing Rent Income Rs 66,000 and Rent Received in Advance Rs 12,000 already reflects Example 2. Do not deduct another Rs 12,000 from rent income.

The common classroom rule is helpful: a fresh adjustment outside the trial balance generally needs both effects, while an adjusted balance inside it is placed in its appropriate final account. However, an opening accrued-income balance is different from a closing adjusted balance. Read the date and the wording, especially when both opening and closing amounts are supplied.

For a wider approach to reading adjustments, use our guide to final-account adjustments and question wording.

Example 6: Opening and closing balances together

Here is a more demanding question. During the year, a business receives Rs 90,000 in commission. It also gives you:

• Accrued commission at the beginning: Rs 5,000.
• Accrued commission at the end: Rs 8,000.
• Commission received in advance at the beginning: Rs 3,000.
• Commission received in advance at the end: Rs 6,000.

Assume the opening accrued amount is collected during the year, the opening advance is fully earned this year, and there are no write-offs, refunds or other movements. The Rs 90,000 is cash received, not an already adjusted income-account balance.

Work from the cash figure:

Step	Amount (Rs)
Cash received during the year	90,000
Less: opening accrual collected, earned last year	(5,000)
Add: closing accrual, earned this year but unpaid	8,000
Add: opening advance, now earned this year	3,000
Less: closing advance, still unearned	(6,000)
Income earned this year	90,000

The answer happens to equal the cash received, but that is a coincidence. Four adjustments offset each other. It does not mean you can ignore them.

For this simple reconciliation:

Income = Cash received + Closing accrual - Opening accrual + Opening advance - Closing advance.

Derive the signs from the years involved rather than memorising a line of pluses and minuses. Money collected against last year’s income must leave this year’s calculation. Money earned this year but still unpaid must enter it.

The closing Balance Sheet shows accrued commission of Rs 8,000 and commission received in advance of Rs 6,000 separately. Do not replace them with a net asset of Rs 2,000.

Six errors worth catching before you submit

1. Calling every receipt income. In the six-month rent example, only the months already completed belong to this year’s income.
2. Treating accrued income as a liability. From the business’s viewpoint, it is owed money; it does not owe that income to someone else.
3. Reversing advance income and prepaid expenses. Receiving money before earning it creates an obligation. Paying an expense before using the benefit creates an asset.
4. Using twelve months automatically. The December loan earns only four months of interest by March.
5. Adjusting an already adjusted balance again. Trace whether the entry is still missing before changing income.
6. Netting unrelated balances. Accrued commission and advance rent tell different stories and need separate presentation.

A refundable security deposit is another useful trap. It is not automatically rental income received in advance. If it is held as a refundable deposit rather than payment for rent, account for that obligation according to the question’s terms.

A short practice set

Try writing the income figure and Balance Sheet item before looking at the answers.

Questions

1. Commission Received is Rs 17,500. Another Rs 2,500 is earned, unreceived and unrecorded. Find adjusted commission and the year-end asset.
2. Rent Received is Rs 63,000, including Rs 7,000 for next April. Find adjusted rent and the year-end liability.
3. On 1 December, Rs 36,000 is received for six months of equal monthly service from December to May, and credited to income. All service through March has been delivered. Split the receipt at 31 March.
4. A business lends Rs 80,000 at 9% per annum on 1 February. Nothing has been received or recorded by 31 March. Calculate accrued interest.
5. An adjusted trial balance lists Fees Income Rs 48,000 and Fees Received in Advance Rs 8,000. No further adjustment is given. What goes to the Profit and Loss Account?
6. A business received Rs 15,000 and initially credited Advance Commission. By year-end it has earned Rs 9,000. State the adjustment and remaining liability.
7. Profit before adjustments is Rs 72,000. Unrecorded accrued income is Rs 4,000; income includes an unearned advance of Rs 6,500. Find corrected profit.
8. Cash income receipts are Rs 50,000. Opening and closing accruals are Rs 2,000 and Rs 5,000; opening and closing advances are Rs 4,000 and Rs 3,000. Assume only cash collection and earning movements. Find income earned.

Answers with quick checks

1. Income Rs 20,000; asset Rs 2,500. Add the missing earned amount.
2. Income Rs 56,000; liability Rs 7,000. Remove next April’s rent from this year.
3. Income Rs 24,000; advance Rs 12,000. Four of six months have been completed; two remain.
4. Rs 1,200. Rs 80,000 x 9/100 x 2/12. Record interest income and accrued interest of the same amount.
5. Rs 48,000. The balances are already adjusted. Show Rs 8,000 separately as a liability.
6. Debit Advance Commission Rs 9,000; credit Commission Income Rs 9,000. The liability remaining is Rs 6,000.
7. Rs 69,500. Rs 72,000 + Rs 4,000 - Rs 6,500.
8. Rs 54,000. Rs 50,000 + Rs 5,000 - Rs 2,000 + Rs 4,000 - Rs 3,000.

Your final answer checklist

Before putting down your pen, check the reporting date, the period covered, and whether the amount is already recorded. Then write the journal entry, the adjusted income figure and the separate asset or liability. Finally, make sure the direction of the profit change makes sense.

For the original two questions, March work paid in April belongs to the year ending in March. March money for April work belongs to the following year’s income. Once you can explain that timing in ordinary words, the debit and credit become much easier to defend.

Frequently asked questions

What is the difference between accrued income and income received in advance?

Accrued income is already earned but still unreceived. Income received in advance has been collected but is not yet earned. The first creates a receivable; the second represents an obligation to provide the promised benefit.

Is accrued income an asset or income?

There are two related accounts. The earned amount is included in income for the year, while the unpaid amount is carried as an asset called accrued income or income receivable. That is why the adjustment has two effects.

Why is income received in advance a liability?

The business has received value before completing what it owes in return. Until the relevant service or rental period is provided, the unearned amount remains an obligation rather than earned income.

What is the journal entry for accrued income?

Debit Accrued Income and credit the relevant income account for the unrecorded amount earned. Use specific names such as Accrued Interest and Interest Income where possible.

What is the journal entry for income received in advance?

If the receipt was credited to income, debit that income account and credit Income Received in Advance for the unearned portion. If it was initially credited to an advance liability, transfer only the earned portion by debiting the advance and crediting income.

Does accrued income have to be overdue?

No. Interest can be earned with the passage of time even when the contractual payment date is still in the future. “Not yet received” does not necessarily mean “late payment.”

Does the year-end adjustment change the bank balance?

Not in these examples. The adjustment records earning or moves an unearned amount out of income. Bank changes when money is actually received, and that receipt is a separate entry.

Should I adjust income again if accrued income is in the trial balance?

Not if it is a closing balance in an adjusted trial balance and the income already includes the adjustment. Check whether the figure is opening, closing or a fresh additional adjustment before deciding.

What happens when accrued income is collected next year?

If no reversing entry has been passed, debit Bank and credit the accrued-income asset. The receipt settles the receivable without recognising the same income twice.

Can a business have accrued income and advance income at the same time?

Yes. Different customers or arrangements can be at different stages. Show the receivable and advance obligation separately, and adjust each related income amount only as required.