Chapter 6 introduces two year-end income adjustments. Students mix them up because one is an asset and one is a liability. This grid pulls both together — the key is when the cash moves:
| Income received in advance | Income receivable | |
|---|---|---|
| When does the cash move? | Early — received before the income is earned | Late — earned before the cash is received |
| What it means | Paid, but the business has not yet done its part → the amount belongs to next year | Work done, but the cash is still owed → the amount belongs to this year |
| Asset or liability? | Current liability — the business still owes the customer a service | Current asset — the business is owed money it has already earned |
| If the year-end adjustment is omitted | Income overstated → profit overstated | Income understated → profit understated |
How to read it: the asset/liability flips with the timing — cash early is money the business must still work for, so it is a current liability; cash late is money already earned and owed to the business, so it is a current asset.
The year-end entries (each reversed on the first day of the next financial period):
| Adjustment | Debit | Credit |
|---|---|---|
| Income received in advance | Income | Income received in advance |
| Income receivable | Income receivable | Income |