Unearned Income
Such an income that has not been earned as yet but has been received in advance is called Unearned Income.
Adjustment:
A. If Unearned Income is given outside the trial balance: In such cases, two entries will be passed:
- Will be deducted from the related Income A/c in the Cr. side of the Profit & Loss A/c
- Will be shown in the Liabilities side of the Balance Sheet.
B. If Unearned Income is given inside the trial balance: It will only be shown on the Liabilities side of the Balance Sheet.
Illustration:
The Trial Balance of Ms. Samriti for the year ended March 31 2023, appears as follows:
The following adjustments were noted on that date:
1. Amount of Closing stock on 31st March 2022 was ₹15,000.
2. Outstanding wages amounting to ₹500.
3. Salary paid in advance amounting to ₹5,000.
4. Commission amounting to ₹1,500 is still to be received.
5. Rent received in advance amounts to ₹3,000.
Prepare Trading and Profit and Loss A/c and balance sheet after taking the following adjustments into consideration.
Solution:
Financial Statement with Adjustment with Examples-I
Through adjustments in the financial statement, we consider all the accounting items which are relevant to the current financial year, but not recorded in the books due to any reason or wrongly recorded. This helps us in getting the actual profit or loss for the year and the accurate financial position of the company. Five basic adjustments, like Closing Stock, Outstanding Expenses, Prepaid Expenses, Accrued Income, and Unearned Income are discussed below.