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What is unearned Income ? Accounting with example.

What is Unearned Income?

In Accounting term,Unearned incomes are those Incomes That are received but not earned.The term has a different meaning in tax perspective, Income derived from other than personal effort such as dividend, interest etc. Here we are considering unearned income as an accounting term and its accounting process.

Examples of Unearned Income

We can explain unearned income in accounting as an 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.

Accounting of unearned Income

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.

Journal entry of unearned income

Unearned income journal entry

Normally when we receive an amount by any means recorded in the receipt voucher. The data entry of unearned income shall be done in the following manner.

Unearned Income receipt

After this entry is posted,the income ledger of current year affected as follows.

Income Ledger

 

The balance of apprenticeship premium account 20000, shows the apprenticeship premium income earned and will be charged to profit and loss account at the time of preparing final accounts. see this in the picture below.

unearned income and profit and loss account

Unearned Income Ledger appear as follows.

Ledger for unearned income

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.

Unearned Income in Balance sheet

Unearned revenue reported under current liabilities of balance sheet. The balance must be carried forward to the next financial year and charged to the profit as it is earned during the year.

Unearned income in the balance sheet

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