Income Received in Advance Journal Entry

Income received in advance is the amount of cash that a customer paid to company before receiving goods or services.

Income is the money that you receive in exchange for goods or services. It is the main source of cash flow for the business. The company generates cash flow from sales and uses it to pay for the supplier, employees, and other parties. It is very important to manage the cash flow and prevent any liquidation.

The company will generate revenue by providing goods or services. It is the top line of the income statement, which represents the normal course of operation. The revenue will be reduced by the cost of goods sold and other expenses related to business operations. The remaining balance will be classified as profit for the company.

In some situations, the company receives cash from the customer even before providing goods or services to them. The cash that company receives in advance is not classified as income. It is the company obligation to provide products to the customer. So it is recorded as a liability on the balance sheet until the products are delivered to the customers.

When company receives cash from a customer, the company records it as a liability. The cash received will be recorded as the unearned revenue which is present as the current liability on balance sheet. When the products are delivered to customers, the company will reverse the liability to the sales revenue.

Some companies generate revenue through the sales of their own products while others act as more middlemen between other businesses and buyers. They generate revenue by collecting transactional fees along the way. Other companies provide an intermediary service usually for a fee.

Regardless of the method by which companies generate income, they have to provide goods or services to customers in exchange for revenue. However, if the company receives cash in advance, it cannot record it as revenue. They have to record the unearned revenue which is the liability.

Income Received in Advance Journal Entry

When the company received income in advance, the accountants will record cash received and unearned revenue. It is the current liability that shows on balance sheet. It represents the amount of cash that company receives before providing goods services. The journal entry is debiting cash and credit unearned revenue.

Account	Debit	Credit
Cash	$$$
Unearned Revenue		$$$

The transaction will increase cash on balance sheet as the customer already made a payment. It also increases the current liability. When the sales transaction is completed, the company needs to record sales revenue in the income statement. The company also completes the obligation, so the current liability must remove too. The journal entry is debiting unearned revenue and credit sales revenue.

Account	Debit	Credit
Unearned Revenue	$$$
Sales Revenue		$$$

Income Received in Advance Journal Entry Example

ABC is a consulting firm that provides various services to customers. On 01 January, company receive an income of $ 10,000 from one customer. However, the service will start on 15 January and finish on 30 January. Please prepare journal entry for income received in advance.

On 01 January, company receive $ 10,000 of income in advance while the service had not yet started. So it is not yet classified as income, company needs to record it as unearned revenue which is the current liability. The journal entry is debiting cash of $ 10,000 and credit unearned revenue of $ 10,000.

Account	Debit	Credit
Cash	10,000
Unearned Revenue		10,000

On 15 January, ABC start to work for the customer, but it had not yet completed the service, so they are not required to make any record.

On 30 January, the company has completed the service for customer. It is time to record sales revenue. The journal entry is debiting unearned revenue $ 10,000 and credit sales revenue $ 10,000.

Account	Debit	Credit
Unearned Revenue	10,000
Sales Revenue		10,000