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

On 31 March, a firm records the adjusting entry for commission received in advance of Rs 12,000. Which entry is correct?

The correct entry is to debit Commission Account and credit Commission Received in Advance Account by Rs 12,000. This reduces current-year income by the amount not yet earned and records a liability, as the firm owes service or commission to the payer next year.

  1. ACommission Account Dr 12,000 to Commission Received in Advance Account 12,000Correct
  2. BCommission Received in Advance Account Dr 12,000 to Commission Account 12,000
  3. CAccrued Commission Account Dr 12,000 to Commission Account 12,000
  4. DCash Account Dr 12,000 to Commission Received in Advance Account 12,000

Explanation

Commission already credited to the income account includes an amount belonging to the next year. Debit Commission Account to reduce current income and credit Commission Received in Advance, a liability. Option 2 reverses the entry, and Accrued Commission is for income earned but not received.

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