What is Prepaid income | Example | Journal Entry

prepaid income feature image

1. What is Prepaid income?

Prepaid income means that income which is received but not earned. In other words, the income received by the company before providing services to the other company or individual.

 

 

According to the rule and principle of the accounting, income/expense is recorded in the books of that financial year in which actual it has earned/due. So, That’s why we have to create the account of accrued income.

Example:

  1. On 01/08/2017, rent of Rs. 5,000/- per month received for the let-out building for the period of one year in advance.

Because Current financial year ends on 31/03/2018

So, from 01/04/2018 to 31/07/2018 is advance rent received.

Months From 1/4/18 to 31/07/18 = 4*5000 = 20,000/-

2. Journal entry for Prepaid income with the golden rule.

Example:

On 01/08/2017, rent received for the let-out building for the period of one year in advance.

So in this transaction, we will treat three accounts with the golden rules of accounting shown as following.

  1. Cash a/c -> Asset A/c -> Real Rule  -> Cash Comes in -> Debit
  2. Rent received A/c -> Income A/c -> Nominal Rule -> Rent Earned -> Credit

  3. Advance Rent received A/c -> Representative personal A/c -> Personal Rule -> Tenant paying cash, giver  -> Credit

The journal entry for the transaction is the following:

Journal entry for prepaid income - What is Prepaid income | Example | Journal Entry
The Journal entry for prepaid income

3. Journal entry for Prepaid income with the Modern rule.

Example:

On 01/08/2017, rent received for the let-out building for the period of one year in advance.

So in this transaction, we will treat three accounts with the modern rules of accounting shown as following.

  1. Cash a/c -> Asset A/c -> Assets Rule  -> Increase in Asset -> Debit
  2. Rent received A/c -> Income A/c -> income Rule -> increase in income -> Credit

  3. Advance Rent received A/c -> Liability a/c-> Liability Rule -> Increase in Liability  -> Credit

The journal entry for the transaction is the following:

Journal entry for prepaid income - What is Prepaid income | Example | Journal Entry
The Journal entry for prepaid income

 

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.