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

Rohan & Co. earns commission income. At the year-end 31 March, commission of Rs 8,000 for March has been earned but not yet received. How should this be treated in the final accounts?

Commission earned but not received must be added to commission income in the Profit and Loss Account and shown as accrued income, a current asset, in the Balance Sheet. This follows the accrual concept, under which income is recognised when earned, not when cash is received.

  1. AIgnore it until cash is received, since it is not yet received
  2. BAdd Rs 8,000 to commission income and show it as an asset (accrued income) in the Balance SheetCorrect
  3. CDeduct Rs 8,000 from commission income and show it as a liability
  4. DAdd Rs 8,000 to commission income and show it as a liability

Explanation

Under the accrual concept, income earned is recognised whether or not cash is received. The Rs 8,000 is added to commission in the Profit and Loss Account and shown as accrued income, a current asset. Treating it as a liability or ignoring it would misstate profit.

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