Prepaid Income

Prepaid Income is income that has been received but relates to the following accounting period, ie income in advance. It can also be referred to as deferred income.

As the income has been received in the current year but relates to the nest year, it needs to be adjusted for by removing it from current years income.

Prepaid income has a dual effect and needs to be accounted for by:

a) Decreasing the relevant income account in the statement of profit or loss as the cash has been received in the current year but the income relates to the next year.

c) Recording a current liability called ‘prepaid income’ in the statement of financial position as the business has not earned this income yet so owes it back again.

Prepaid income is a current liability account.

The adjustments for prepaid income tend to occur at the end of the year and are made by way of a journal entry.

The journal which would be posted in the general ledger is:

A suitable narrative for the above journal entry is:

‘Being: an adjustment to record the XX prepaid income for the year ended XX’

How to Approach Exam Tasks

Read the requirement to the task carefully to identify what you are being asked to do.

Calculate income for the year:

a) Review all the cash receipts listed in the question and identify which relate to the current year.

b) If all of the cash receipt relates to the current year, include the full amount in income.

c) If some or all of the cash receipt relates to the next year, only add to income the portion relating to the current year (pro-rate where necessary).

Calculate prepaid income for at the end of the year:

a) Review the task for any cash receipts in the current year which relate to the next year.

b) Calculate where necessary the portion of that cash receipt which relates to the next year - this is the prepaid income.

Record the accounting entries:

1. Record cash receipts in the year by:

2. Record prepaid income by:

3. Balance off.