IGCSE Accounting for Prepaid Income
We will learn when a business records income as earned and when income is considered received in advance. We will also learn how to adjust for prepaid income and record in the income account and financial statements.
The income account covered in this lesson is used to record other income earned by the business and does not include the sales revenue account of a trading business.
Related Lessons:
Determining Prepaid Income
Income is regarded as earned when goods or services has been provided, regardless of whether payment is received.
Prepaid income is regarded as income received in advance when a payment is received in advance of the provision of goods or services. Therefore, prepaid income is a current liability to the business.
To calculate prepaid income:
- Calculate total income earned for the accounting period.
- Determine the total amount received for the accounting period.
- Amount received in excess of total income earned is regarded as prepaid income.
Adjusting for Prepaid Income Brought Forward
Income received in the previous accounting period is carried forward to the next accounting period when the business provides the service it owes. At this point, the amount is no longer treated as a current liability and is recognised as income earned.
Therefore, the amount is transferred from the current liability account to the income account to record the income for the current year, as the service has now been provided.
This amount is recorded as “Balance brought down” on the credit side of the income account.
Recording Prepaid Income
1. Prepaid income brought forward is recorded on the credit side as “Balance brought down”
2. Income received during the year increases our income, and is therefore recorded on the credit side as Cash or Bank
3. Income earned for the current period is recorded on the debit side as Income Statement
4. Prepaid income for the current period is recorded on the debit side as “Balance carried down”
Recording in the Financial Statements
Amount transferred from the income account to the Income Statement is recorded in the Income Statement as an Income.
The amount of prepaid income at the end of the current accounting period is recorded in the Statement of financial position under Current Liability as Other Payables.