Adjustment of Unearned Income in Final Accounts (Financial Statements)

Such an income that has not been earned as yet but has been received in advance is called Unearned Income. It doesn't belong to the current financial year but has been received in advance. Any unearned income received depicts a false image of the profitability of the business and hence requires an adjustment to nullify the effect.

Adjustment:

A. If Unearned Income is given outside the trial balance: In such cases, two entries will be passed:

• Will be deducted from the related Income A/c in the Cr. side of the Profit & Loss A/c
• Will be shown in the Liabilities side of the Balance Sheet.

B. If Unearned Income is given inside the trial balance: It will only be shown on the Liabilities side of the Balance Sheet.

Illustration:

Solution:

Related Articles:

• Adjustment of Interest on Capital in Final Accounts
• Adjustment of Interest on Drawings in Final Accounts
• Adjustment of Interest on Loan in Final Accounts