Income Receivable

Key Concepts

Based on the accrual basis of accounting, income is recorded when it is earned — when the goods or services have been provided — regardless of when cash is received.

Income receivable arises when a business has earned income but has not yet received the cash. The amount earned is recorded as income even though the cash has not yet been received — it is treated as an amount owed to the business.

Income receivable is a current asset — the business is owed money it has already earned.

The account name follows the type of income — [Income type] receivable (e.g., Rental income receivable, Commission income receivable).

How to Remember

Income receivable = earned but not yet received = current asset.

• Year-end (Adjustment): Dr [Income type] receivable / Cr [Income type]
  • If omitted: income understated → profit understated
• First day of next period (Reversal): Dr [Income type] / Cr [Income type] receivable

Step-by-Step Approach

Step 1 — Year-end: Record income that has been earned but not yet received

Step 2 — Start of next financial period: Reverse the year-end adjustment

Why reverse? The cash arrives this year, but the income was already counted last year — so we cancel the receivable to avoid counting the same income twice.

Effects If Adjustment Not Made

If the year-end adjustment (Step 1) is not made:

• Income is understated → Profit is understated
• [Income type] receivable is not recorded → current asset is understated

Statement of Financial Position (extract)

Tip — Finding a missing figure

An income account is built from up to four pieces:

• Opening reversal — last year's adjustment reversed at the start of this year (may or may not appear)
• Cash received — cash collected during the year (Cash at bank / Cash in hand)
• Year-end adjustment — income not yet earned set aside (received in advance), or income earned but not yet received added on (income receivable)
• Income earned — the amount closed to Income summary; this is the income for the year

A question gives you all but one and leaves the last for you to find. These pieces are linked by one relationship:

Income earnedfx

Income earned = cash received − income received in advance + income receivable

In plain terms: start from the cash, take away what was received but not yet earned (received in advance), and add what was earned but not yet received (receivable). Rearrange this to find whichever piece is missing.

Harder case — an opening reversal. Most questions use only the three pieces above. Some also show an opening reversal at the start of the year. A reversal cancels last year's year-end adjustment, so it moves the opposite way to a year-end adjustment of the same name:

• Received in advance brought in from last year → add it (the cash came in last year, but it is earned this year)
• Receivable reversed out from last year → subtract it (it was already counted as income last year, but the cash only arrives this year)

Missing the income earned? Work forward.
Firefly Traders received $12,000 commission in cash during the year ended 31 December 20X5. At year end, $1,500 of commission had been earned but not yet received. There were no opening balances.

Income earned = cash received + earned but not yet received
= $12,000 + $1,500 = $13,500

Missing a component (cash received or an adjustment)? Work backwards.
Tropical Trading's rental income earned for the year ended 31 December 20X5 was $24,000. On 1 January, $1,000 received in advance was brought into this year; on 31 December, $1,500 was set aside as received in advance. Find the cash received during the year.

Cash received = income earned + set aside this year (adjustment) − brought in from last year (reversal)
= $24,000 + $1,500 − $1,000 = $24,500