Income received in advance is money received in this year for something that will be provided in a later year. Only the part earned in the year is income. The rest is a current liability. It appears in questions about rent receivable, membership fees, subscriptions and commission, whenever a customer’s payment covers more than the year.
It is the mirror image of a prepaid expense from calculating a prepaid amount from dates and belongs to accruals and prepayments.
Why is it a liability, not income?
When a customer pays for a service in advance, the business has the cash but still owes the work. If it stopped trading, it would still owe the customer the service. That promise is a liability.
Compare the two directions:
| Item | The business has | In the statement of financial position |
|---|---|---|
| Prepaid expense | Paid for a benefit not yet received | Current asset |
| Income received in advance | Been paid for a service not yet given | Current liability |
In the income statement, an advance receipt reduces income, while a prepayment reduces expense.
How do you work it out, step by step?
- Write down the amount received in the year.
- Divide by the months covered to get the income per month.
- Count the months earned up to the year end. This is the income for the year.
- Count the months after the year end. This is the income received in advance.
- Check that income plus advance equals the amount received.
Worked example
Studio Tari Seri rents out a practice room. On 1 November 2025 a dance group paid RM 1,800 for 6 months of room hire, covering November 2025 to April 2026. The year end is 31 December 2025.
Step 1, income per month: 1,800 ÷ 6 = RM 300.
Step 2, months earned in 2025: November and December, so 2 months. Income = 300 × 2 = RM 600.
Step 3, months in advance: January to April 2026, so 4 months. Income received in advance = 300 × 4 = RM 1,200.
Step 4, check: 600 + 1,200 = RM 1,800, the amount received.
The rent income account looks like this:
| Debit | RM | Credit | RM |
|---|---|---|---|
| 31 Dec Income received in advance c/d | 1,200 | 1 Nov Bank | 1,800 |
| 31 Dec Income statement | 600 | ||
| 1,800 | 1,800 | ||
| 1 Jan Income received in advance b/d | 1,200 |
Both sides total RM 1,800. The RM 1,200 is a current liability at 31 December 2025. In January 2026 it is brought down on the credit side and becomes income as the months are used.
The mistake to watch for
A common slip is to treat the whole receipt as income, or to show the advance as an asset because it sounds like a good thing to have.
Mistaken answer: Rent income RM 1,800. Income received in advance of RM 1,200 shown as a current asset.
The student used the cash received as the income and then placed the advance on the wrong side of the statement of financial position.
The correction has two parts. Income in the income statement is RM 600, so profit in the mistaken answer was overstated by RM 1,200.
The RM 1,200 goes under current liabilities, because the studio still owes the room hire. A helpful question is “does the business owe something to someone?” If yes, it is a liability.
Check yourself
Try these on paper, then open each answer.
1. Gym Pantas received RM 4,800 on 1 September 2025 for 12 months of membership. The year end is 31 December 2025. Find the income for 2025 and the income received in advance.
Show answer
Income per month = 4,800 ÷ 12 = 400. Earned: September to December, 4 months, so income = RM 1,600. Advance = 400 × 8 = RM 3,200. Check: 1,600 + 3,200 = 4,800.
2. A shop received commission of RM 2,500 during the year. RM 400 of it was for services to be given next year. What is the commission income for the year?
Show answer
2,500 − 400 = RM 2,100. The RM 400 is income received in advance, a current liability.
3. If the gym in Question 1 ignored the advance, by how much would its profit be overstated?
Show answer
By RM 3,200. The whole RM 4,800 would be counted as income, but only RM 1,600 was earned in 2025, and 4,800 − 1,600 = 3,200.
Where this leads next
The next step is to see how all of these adjustments change a full statement, in adjusting a statement after an accrual. Practise the entries in the double-entry and ledger trainer, and return to the module overview when you want the whole route.
Students often understand expenses first and income second, or the other way round. Our teachers can look at which direction you reverse in online one-to-one Accounting tuition.