Income received during a period but applicable to the next period is termed unearned income.Suppose for example,a company received on April 1 2016 apprentice premium amounting to 60000 for three years. Though the trail balance drawn up at March 31st 2017,Shows 60000 against apprentice premium the whole amount should not be treated as Income for the current year.It is for three years services that the company has received 60000.Therefore, only one-third of the 60000 should be taken as income earned during the first year;the remaining two third must be carried forward.
In other words,the unearned income of 40000 should be taken out of the income account and transferred to another account,which will be shown on the liabilities side of the balance sheet to indicate the companies obligation to render in the future service for which it has already been paid.This is accomplished by the following journal entry.
After this entry is posted,the two accounts affected will appear as follows.
The balance of apprenticeship premium account 20000, shows the apprenticeship premium income earned and will be credited to profit and loss account at the time of preparing final accounts.
This account shows the company’s obligation to render apprentice service during 2017-18 & 2018 -19 ;its credit balance should be shown on the liabilities side of the balance sheet.