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Accountancy > Financial Statements > Prepaid Expenses, Accrued Income and Income Received in Advanced
Financial Statements

Prepaid Expenses, Accrued Income and Income Received in Advanced

As we know that accounting is done on the basis of the Accrual concept. As per this concept, we not only record the transactions that are in cash only but also those which relate to the accounting year whether in cash or not. In order to determine the correct profit and loss and the true and fair financial position at the end of the year, we need to account for all the expenses and incomes pertaining to the current accounting year. Thus, Outstanding Expenses, Prepaid Expenses, Accrued Income and Income Received In Advance require adjustment.

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Outstanding Expenses

Sometimes in the normal course of business, an enterprise may have some expenses relating to which the payment is due at the end of the year. We know these expenses as Outstanding Expenses.

Wages, salary, rent, interest on the loan, etc. are examples of such expenses that may remain due at the end of the accounting year.

However, we need to record them as they relate to the incomes of the current year. Like all other expenses, they are also a charge against the profit of the current year.

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The Journal entry to record outstanding expenses is:

Date Particulars Amount (Dr.) Amount (Cr.)
Expense A/c Dr.
To Outstanding Expense A/c
(Being recording the expense for the current year outstanding)

 

The Outstanding Expense A/c appears on the liability side of the Balance Sheet. While preparing the Trading and Profit and Loss A/c we need to add the amount of outstanding expense to that particular expense.

Prepaid Expenses

In the normal course of business, some of the expenses may be paid in advance. However, the organization may not receive the benefits from these expenses by the end of the current accounting year. We call these expenses as prepaid expenses. We treat them as current assets.

The Journal entry to record prepaid expenses is:

Date Particulars Amount (Dr.) Amount (Cr.)
Prepaid Expense A/c Dr.
To Expense A/c
(Being prepaid expense recorded)

 

The Prepaid Expense A/c appears on the assets side of the Balance Sheet. While preparing the Trading and Profit and Loss A/c we need to deduct the amount of prepaid expense from that particular expense.

Accrued income, Advance income and Prepaid expenses

Accrued Income

It may so happen that we may earn some incomes during the current accounting year but not receive them in the same year. Such income is accrued income.

Thus, these incomes pertain to the current accounting year. Therefore, we need to record them as current year’s incomes.

The Journal entry to record accrued incomes is:

Date Particulars Amount (Dr.) Amount (Cr.)
Accrued Income A/c Dr.
To Income A/c
(Being recording of accrued incomes)

 

The Accrued Income A/c appears on the assets side of the Balance Sheet. While preparing the Trading and Profit and Loss A/c we need to add the amount of accrued income to that particular income.

Income Received in Advance

In the ordinary course of a business, it may receive some incomes in advance in spite of not rendering the services. Such incomes are incomes received in advance.

Thus, these are not pertaining to the current accounting year. Therefore, these are current liabilities.

The Journal entry to record income received in advance is:

Date Particulars Amount (Dr.) Amount (Cr.)
Income A/c Dr.
To Income Received in Advance A/c
(Being income received in advance recorded)

The Income Received in Advance A/c appears on the liabilities side of the Balance Sheet. While preparing the Trading and Profit and Loss A/c we need to deduct the amount of income received in advance from that particular income.

Solved Example For You

From the following information pass the necessary journal entries relating to the items of expenses and incomes. Also, show their treatment in the Trading and Profit and Loss A/c and the Balance Sheet.

  1. Interest on loan expenses ₹150000. The interest of ₹50000 is outstanding.
  2. Wages expense ₹72000. Out of this wages of ₹12000 pertains to the next accounting year.
  3. The commission received ₹15000. Amount of commission earned but not received is ₹5000.
  4. Rent received ₹50000. Rent of ₹10000 is received in advance.
Ans.

Journal Entries

Date Particulars Amount (Dr.) Amount (Cr.)
1. Interest on Loan A/c Dr. 50000
To Outstanding Interest on Loan A/c 50000
(Being recording the interest on a loan for the current year outstanding)
2. Prepaid Wages A/c Dr. 12000
To Wages A/c 12000
(Being prepaid wages recorded)
3. Accrued Commission A/c Dr. 5000
To Commission A/c 5000
(Being recording of accrued commission)
4. Rent A/c Dr. 10000
To Rent Received in Advance A/c 10000
(Being rent received in advance recorded)

 

Trading and Profit and Loss A/c (extract)

For the year ending….

Particulars Amount (Dr.) Particulars Amount (Cr.)
To Opening Stock A/c By Sales A/c
To Purchases A/c By Closing Stock A/c
To Wages A/c 72000
Less: Prepaid wages (12000) 60000
To Gross Profit c/d
xxx xxx
To Interest on Loan A/c 150000 By Gross Profit b/d
Add: Outstanding interest on a loan 50000 200000 By Commission A/c 15000
  Add: Accrued commission 5000 20000
  By Rent A/c 50000
  Less: Rent received in advance (10000)
To Net Profit    
  xxx   xxx

 

Balance Sheet

As at …

Liabilities Amount Assets Amount
Capital Fixed Assets:
Add: Net Profit Land and Building
Less: Drawings Plant and Machinery
Long-term liabilities: Furniture and Fixtures
Bank Loan Current Assets:
Current Liabilities: Stock
Outstanding Interest on Loan 50000 Debtors
Rent received in advance 10000 Prepaid Wages 12000
Accrued Commission 5000
xxx xxx

 

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