Rent of ₹10000 is received in advance.Accrual-based accounting is used across all organizations today to apply the matching principle of accounting. The amount of commission earned but not received is ₹5000. Out of this wages of ₹12000 pertains to the next accounting year. Also, show their treatment in the Trading and Profit and Loss A/c and 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.įrom the following information pass the necessary journal entries relating to the items of expenses and incomes. The Income Received in Advance A/c appears on the liabilities side of the Balance Sheet. The Journal entry to record income received in advance is: Therefore, these are current liabilities. Thus, these are not pertaining to the current accounting year. Such incomes are incomes received in advance. In the ordinary course of a business, it may receive some income in advance in spite of not rendering the services. While preparing the Trading and Profit and Loss A/c we need to add the amount of accrued income to that particular income. The Accrued Income A/c appears on the assets side of the Balance Sheet. The Journal entry to record accrued incomes is: Therefore, we need to record them as current year’s incomes. Thus, these incomes pertain to the current accounting year. It may so happen that we may earn some incomes during the current accounting year but not receive them in the same year. While preparing the Trading and Profit and Loss A/c we need to deduct the amount of prepaid expense from that particular expense. The Prepaid Expense A/c appears on the assets side of the Balance Sheet. The Journal entry to record prepaid expenses is: We call these expenses as prepaid expenses. However, the organization may not receive the benefits from these expenses by the end of the current accounting year. In the normal course of business, some of the expenses may be paid in advance. While preparing the Trading and Profit and Loss A/c we need to add the amount of outstanding expense to that particular expense. The Outstanding Expense A/c appears on the liability side of the Balance Sheet. The Journal entry to record outstanding expenses is: Like all other expenses, they are also a charge against the profit of the current year. However, we need to record them as they relate to the incomes of the current year. are examples of such expenses that may remain due at the end of the accounting year. Wages, salary, rent, interest on the loan, etc. We know these expenses as 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. Thus, Outstanding Expenses, Prepaid Expenses, Accrued Income, and Income Received In Advance require adjustment. 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. 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. Prepaid Expenses, Accrued Income and Income Received in AdvancedĪs we know that accounting is done on the basis of the Accrual concept. The compilation of these Financial Statements Notes makes students exam preparation simpler and organised.
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