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CSEET · Fundamentals of Accounting · Preparation of Final Accounts for Sole Proprietorship

Which of the following is the correct treatment of 'income received in advance' in the final accounts of a sole proprietor?

Income received in advance is deducted from the relevant income in the Profit and Loss Account because it belongs to the next period. It is shown as a liability in the Balance Sheet, since the business still has to provide the service or goods.

  1. AAdded to income in the Profit and Loss Account and shown as an asset
  2. BDeducted from income in the Profit and Loss Account and shown as a liability in the Balance SheetCorrect
  3. CDeducted from income in the Profit and Loss Account and shown as an asset in the Balance Sheet
  4. DIgnored in the Profit and Loss Account and shown on the capital side

Explanation

Income received in advance relates to a future period, so it is deducted from the income of the current year. Since the business owes the service or goods to the payer, it is a liability. Treating it as an asset confuses it with accrued income.

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