Question

Yummy food received an advance payment of OMR 1,000 for the order to be delivered after two months. Write a short note on unearned income/ income received in advance with a literature review and by providing examples.?

Answer 1

Unearned income is the income which is received by the firm in advance without completing the duties related to the payment. The income received is considered as earned only when the fiduciary duties related to the income has been completed but if the income received without fulfilling duties related to it then it is called as unearned income.

For example, if the firm receives $5,000 rent of April 2020 on January 2020 then it is considered as unearned income for April 2020.

Similarly, Yummy food receives advance payment of OMR 1,000 for which it requires to fulfil its duty of delivering order after 2 months. Thus, considered as unearned income.

Unearned income should be treated as liability until the firm complete all its duties. The entry for receiving unearned income will be:

Cash A/c                                 Dr. OMR 1,000

     To Unearned income A/c                                       Cr. OMR 1,000

(Being unearned income received)

When the income is earned after completing duties related to such income, then adjusting entry will be:

Unearned income A/c             Dr. OMR 1,000

      To Revenue A/c                                                    Cr. OMR 1,000

(Being adjustment made for unearned revenue received)