Similarities & Differences Between Prepaid Income And Prepaid Expenses

Unearned Revenue Or Prepaid Income or Income Received In Advance is the Revenue or Income actually not earned by the company and in which the company or corporation has to deliver the services against the payment received in advance during the accounting period. These are Current Liabilities to be shown on the Balance Sheet as still the services have not yet been delivered but the payment is received from client. Examples are Accrued / Prepaid Investment, Prepaid Commission, etc. On the other hand, Prepaid Expenses are the Expenses paid in advance against which the services are still needed to be delivered to the company. These are also Current Assets to be shown the balance sheet as the benefits are still to be received from the company. Examples are Prepaid Rent, Advances to Customers, etc.

The Journal Entry to record Prepaid Income is debit the cash account and Credit the prepaid income account. At the end of accounting the portion of prepaid income against which the services are delivered is transferred to relevant revenue account while in case of prepaid expenses 2 Methods are followed i.e., prepaid expenses initially recorded as expenses or prepaid expenses initially recorded as Assets. Which method you adopt, either expenses are debited or prepaid expenses account are debited and other account is cash account. At the end of the accounting period, the portion of benefits which is still prepaid is transferred to prepaid expenses accounts if first method is adopted and the portion of benefits which is received and against which advance payment is made is transferred to relevant expenses accounts by credited prepaid expenses accounts under second method.