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Fundamentals of Financial and Cost Accounting · Adjustment Entries and Rectification of Errors

Accrued Income and Income Received in Advance Adjustments

Updated 10 October 2026 · Fact-checked

Accrued income is income earned in the year but not yet received. Add it to income and show it as an asset. Income received in advance is cash received for a future period. Deduct it from income and show it as a liability. Credit to the P&L only the income earned for the year.

Understand Accrued Income and Income Received in Advance

Under the accrual basis, you record income when you earn it, not when cash arrives. At the year end, the cash received may not match the income earned. Adjustment entries fix this gap.

Accrued income (also called income earned but not received, or outstanding income) is income that belongs to this year, but you have not yet received it. Example: interest on investments for the last two months is due next year. You add it to income and show it as a current asset, because someone owes you money.

Income received in advance (also called unearned income or unexpired income) is cash you received in this year, but part of it belongs to the next year. Example: you receive a full year's rent, but only part of the year falls in this accounting period. You remove the unearned part from this year's income and show it as a current liability, because you owe the service or space to the payer.

Think of it as a mirror of outstanding and prepaid expenses. Outstanding expense is a liability, so accrued income is an asset. Prepaid expense is an asset, so income received in advance is a liability.

In the final accounts, accrued income is added to the income on the credit side of the Profit and Loss Account. Income received in advance is deducted from it. On the Balance Sheet, accrued income goes under assets and advance income under liabilities.

Key formulas to remember

Income to be credited to P&L
Income for the year = Income received + Accrued income at end − Accrued income at start − Advance received at end + Advance received at start
Use this when opening balances are given. Without opening balances, use only the closing adjustments.
Accrued income entry
Accrued Income A/c Dr. ; To Income A/c
Accrued Income is an asset. It appears in the Balance Sheet.
Income received in advance entry
Income A/c Dr. ; To Income Received in Advance A/c
Income received in advance is a liability. It appears in the Balance Sheet.
Adjusted income in final accounts
Adjusted income = Income per Trial Balance + Accrued − Received in advance
Shows the amount for the P&L credit side.
Accrued amount for part of a year
Accrued income = Annual income × Months unreceived ÷ 12
Use the same method for received in advance: Annual amount × Months of next year ÷ 12.

How to solve Accrued Income and Income Received in Advance questions

Use this method for any accrued income or income received in advance question.

  1. 1Read the question and find which income is involved: rent, interest, commission, dividend and so on.
  2. 2Note the period of the accounting year and the period for which the income was actually earned.
  3. 3Decide the type. If the income is earned but not received, it is accrued. If the cash is received for a period after year end, it is received in advance.
  4. 4Calculate the amount using the number of months or days involved.
  5. 5Pass the entry: Accrued Income A/c Dr. To Income A/c for accrued income, or Income A/c Dr. To Income Received in Advance A/c for advance income.
  6. 6Adjust the Trial Balance figure: add accrued income, and deduct income received in advance.
  7. 7Place the items in the final accounts: adjusted income in the P&L, accrued income under assets and advance income under liabilities.

Quickest way: The add-or-deduct shortcut

When to use it: Use this for MCQs that ask for the adjusted income figure or the Balance Sheet item.

  1. Ask one question: is the extra amount earned but not received, or received but not earned?
  2. Earned but not received: add to income, and the item is an asset.
  3. Received but not earned: deduct from income, and the item is a liability.
  4. Convert the part-year period into months and use Annual amount × Months ÷ 12.
  5. Check the answer options. An adjusted income with the wrong sign is usually one of the options, so eliminate it.

Common mistakes in Accrued Income and Income Received in Advance

  • Deducting accrued income from income instead of adding it.

    Students confuse it with an outstanding expense, which is added to expenses.

    Fix: Accrued income is added to income, just as outstanding expense is added to expense. It is an asset, while outstanding expense is a liability.

  • Showing income received in advance as an asset.

    Cash was received, so it feels like a gain.

    Fix: You owe the service or space for the future period, so it is a liability.

  • Using the full amount instead of only the unearned or unreceived part.

    Students skip the month calculation.

    Fix: Count the exact months or days that belong to the next year or remain unreceived, then use Annual amount × Months ÷ 12.

  • Ignoring opening balances from the previous year.

    Students adjust only for closing figures.

    Fix: If last year's accrued income was received this year, or last year's advance became earned this year, adjust the income for the opening balances too.

  • Adding income received in advance to income.

    Students think more cash means more income.

    Fix: Income belongs to the year it is earned. Remove the part that belongs to the next year.

Worked examples

Example 1

Rent received for the year ended 31 March 2027 per Trial Balance is ₹1,20,000. Of this, ₹10,000 relates to April 2027. Find the rent to be credited to the Profit and Loss Account and the Balance Sheet treatment.

Show the solution
  1. The ₹10,000 was received but belongs to the next year, so it is income received in advance.
  2. Adjusted rent = ₹1,20,000 − ₹10,000 = ₹1,10,000.
  3. Entry: Rent Received A/c Dr. ₹10,000 ; To Rent Received in Advance A/c ₹10,000.
  4. Rent received in advance of ₹10,000 appears under liabilities in the Balance Sheet.

Answer: Rent credited to the Profit and Loss Account is ₹1,10,000. Advance rent of ₹10,000 is a liability.

Example 2

Interest on investments received during the year is ₹36,000. Interest for the last 3 months of the year, ₹9,000, is still due. Find the interest income for the year and state the Balance Sheet treatment.

Show the solution
  1. The ₹9,000 is earned this year but not received, so it is accrued income.
  2. Adjusted interest = ₹36,000 + ₹9,000 = ₹45,000.
  3. Entry: Accrued Interest A/c Dr. ₹9,000 ; To Interest Received A/c ₹9,000.
  4. Accrued interest of ₹9,000 appears under current assets in the Balance Sheet.

Answer: Interest credited to the Profit and Loss Account is ₹45,000. Accrued interest of ₹9,000 is an asset.

Exam tips

  • Read the wording carefully. Words such as due, earned but not received and outstanding mean accrued. Words such as received for next year, unearned and in advance mean advance income.
  • Check the sign of the adjustment before you look at the options. Accrued is added, advance is deducted.
  • Remember the Balance Sheet side. Accrued income is an asset and income received in advance is a liability.
  • If the question gives opening balances, adjust the income for both opening and closing figures.
  • There is no negative marking, so always attempt every MCQ. Eliminate wrong options first.

Practice questions from Adjustment Entries and Rectification of Errors

Accrued Income and Income Received in Advance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accrued Income and Income Received in Advance: frequently asked questions

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

Accrued income is earned in this year but not yet received, so it is an asset and is added to income. Income received in advance is cash received for a future period, so it is a liability and is deducted from income.

What is the journal entry for accrued income?

Debit Accrued Income A/c and credit the Income A/c, for example Accrued Interest A/c Dr. To Interest Received A/c. This increases income for the year and creates an asset.

Is unearned income the same as income received in advance?

Yes. Unearned income, unexpired income and income received in advance all mean cash received for a period that has not yet been earned. It is shown as a liability.

Where do these items appear in the final accounts?

The adjusted income goes to the credit side of the Profit and Loss Account. Accrued income is shown under assets and income received in advance under liabilities in the Balance Sheet.