Two small adjusting entries trip up more accounting learners than almost anything else in the syllabus: accrued income and unearned revenue. They sound like a matched pair, so the instinct is to treat them the same way. They are opposites. Accrued income is money you have earned but not yet received — it sits on your balance sheet as an asset. Unearned revenue is money you have received but not yet earned — it sits there as a liability. Flip the two, and your profit, your assets and your liabilities all go wrong on the same day. This guide walks through what each one is, the exact journal entries, the reversal trap that costs marks and reconciliations, and a memory rule that makes the mistake impossible.
Two timing differences, two opposite sides of the balance sheet
Both entries exist for one reason: cash and performance rarely happen on the same date. You deliver a service in March but get paid in April. A student pays you in January for a course that runs till June. Accrual accounting insists that income belongs to the period it was earned, not the period the cash moved. That single principle creates both of today's entries.
Accrued income is the "earned, waiting for cash" case. Think of interest on a fixed deposit that has built up but not yet been credited, or a consulting fee for work finished but not yet invoiced. You have done your part; the other side owes you. That claim is an asset.
Unearned revenue (also called deferred revenue or income received in advance) is the mirror image: "cash in hand, work still owed." A gym collects an annual membership upfront. A publisher takes a two-year magazine subscription. You hold the money, but you still owe the service. That obligation is a liability.
The quickest way to keep them straight is to ask who owes whom. With accrued income, the world owes you — so it is an asset. With unearned revenue, you owe the world a good or service — so it is a liability. If you are still shaky on why an item lands on one side of the balance sheet rather than the other, our walkthrough of the accounting equation and why it must always balance is the foundation these entries sit on, and a structured ACCA Knowledge Level course drills this reasoning until it becomes automatic.
The two entries live in opposite corners of one simple grid
Source: NIFM Editorial, 2026.
Accrued income: earned, not yet received (an asset)
Accrued income is revenue that relates to the current period but has not been received, and often not even billed, by the closing date. The work is done. The right to the money exists. Only the cash is missing. Under the accrual concept, you must bring that income into this period's profit even though no rupee has arrived.
The classic Indian-exam examples are interest accrued on a deposit, commission earned but not received, and rent due from a tenant for a month already occupied. Say your firm earned ₹60,000 of consulting fees in March but will raise the invoice and collect in April. The income belongs to March.
The adjusting entry on 31 March debits an asset and credits income:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 31 Mar | Accrued Income A/c (asset) … Dr To Consulting Fees (income) |
₹60,000 | ₹60,000 |
| Apr (on receipt) | Bank A/c … Dr To Accrued Income A/c |
₹60,000 | ₹60,000 |
Read the two lines together. In March, income goes up and an asset (the right to be paid) is created. In April, the cash arrives and simply replaces one asset with another — accrued income becomes bank. Crucially, April's entry touches no income account, because the income was already recognised in March. That is the whole point of the accrual: profit is reported when earned, cash or no cash.
On the balance sheet, accrued income (sometimes labelled "income receivable" or "accrued revenue") appears under current assets, close to debtors. It is not the same as a trade receivable from an invoice already raised; it is income the books recognise before the paperwork catches up.
Unearned revenue: received, not yet earned (a liability)
Unearned revenue is the exact reverse. The cash is already in your bank, but you have not yet done the work that entitles you to keep it. Until you deliver, that money is an obligation, not income. Record it as income too early and you overstate this year's profit and hide a real liability.
Suppose a coaching institute collects ₹48,000 in January for a twelve-month programme. On the day the cash lands, none of it is earned. The entry recognises cash and a liability, not income:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| Jan (on receipt) | Bank A/c … Dr To Unearned Revenue A/c (liability) |
₹48,000 | ₹48,000 |
| End of each month | Unearned Revenue A/c … Dr To Course Fee Income |
₹4,000 | ₹4,000 |
Each month, as one-twelfth of the service is delivered, you move ₹4,000 out of the liability and into income. By December the liability is zero and all ₹48,000 has been earned. The liability acts as a holding tank that drains into revenue as you perform.
This is not just a bookkeeping convention. Under Ind AS 115 (India's version of IFRS 15), an advance from a customer is formally a contract liability: you recognise revenue only as performance obligations are satisfied, measured at the consideration received. The same logic flows through to tax and compliance work, which is why the treatment is tested so heavily. Note one practical wrinkle: GST timing can differ from accounting timing, because GST on a service may fall due on the advance even while the revenue stays deferred — confirm the current position with a tax adviser rather than assuming the two dates match.
If the mechanics of the credit-and-debit itself still feel uncertain, it is worth revisiting double-entry bookkeeping basics before layering adjusting entries on top.
The reversal trap: what breaks when you flip them
Here is the mistake that gives this article its title. Because both entries involve "income" and "a timing gap," learners routinely record the wrong one — booking an advance as income, or parking earned income as a liability. The direction of the error decides what breaks.
| Situation | Correct treatment | If you reverse it | Damage |
|---|---|---|---|
| Advance received for future service | ✓ Credit a liability (unearned revenue) | ✗ Credited straight to income | Profit overstated; a real liability hidden |
| Income earned, cash not yet in | ✓ Debit an asset (accrued income) | ✗ Treated as a liability / ignored | Profit and assets both understated |
| Adjusting entry at year-end | ✓ One income, one balance-sheet account | ✗ Two income accounts touched | Income double-counted or netted to nil |
The pattern is worth memorising: get the side of the balance sheet wrong and you automatically get profit wrong in the same direction. Treat a liability as income and profit jumps; treat an asset as a liability and profit sinks. Examiners love this because a single mis-posting ripples through the income statement and the balance sheet at once — one error, two wrong statements.
This is the same family of year-end corrections as the expense side. We cover its mirror image — prepaid and outstanding expenses — in a companion guide to adjusting entries that fix profit. Read the two together and every timing difference in the syllabus falls into place.
Want adjusting entries to feel automatic before the exam?
The ACCA Knowledge Level course works through accruals, prepayments, deferrals and the full set of year-end adjustments with graded practice, in Hindi and English, at your own pace — with a certificate on passing the course assessment.
Explore the ACCA Knowledge Level course →A worked example you can copy
Put both entries on one timeline so the ordering is unmistakable. The difference between accrued income and unearned revenue is purely which comes first — the earning or the cash.
Same two events, reversed order — that is the entire distinction
Source: NIFM Editorial, 2026 (illustrative).
Now a combined close. Imagine a small firm on 31 March with two open items. It has earned ₹15,000 of interest on a deposit that will be credited next month (accrued income), and it has received ₹9,000 upfront for a service it will perform in April (unearned revenue). Two separate adjusting entries are needed, and they land on opposite sides:
- Accrued interest: Dr Accrued Income ₹15,000, Cr Interest Income ₹15,000 — profit up, asset created.
- Advance received: Dr Bank ₹9,000, Cr Unearned Revenue ₹9,000 — cash up, liability created, no profit yet.
Notice that only the accrued-income entry increases this year's profit. The advance sits in a liability and will become income in April. Many learners also pass reversing entries on the first day of the new year for the accrued item, so that when the ₹15,000 is actually received the bookkeeper can record a simple receipt without hunting for the old accrual. Reversing entries are optional and procedural; the accrual decision itself is not.
How to never reverse them again
The fix is not more rules — it is one question asked in the right order. Before you write anything, settle two facts: has the work been earned, and has the cash moved? The answer points to exactly one corner of the grid from earlier.
Keep this four-point checklist beside you until it is reflexive:
- Name the obligation. Do you still owe a service (liability) or does someone owe you money (asset)? That one word decides the side.
- Touch one income account only. A correct adjusting entry has exactly one income line and one balance-sheet line. Two income lines means you have reversed something.
- Follow the money next period. Accrued income converts to bank with no new income; unearned revenue converts to income with no new cash. If your follow-up entry hits income twice, trace it back.
- Check the direction of the error. If profit looks surprisingly high, suspect an advance booked as income; if surprisingly low, suspect earned income still parked as a liability.
Master these two entries and the rest of the adjustments — accrued and prepaid expenses, depreciation, provisions — follow the same logic. They are the reason accrual accounting tells the truth about a period that cash accounting cannot. For how these postings then flow into the books of account, our guide to the journal, ledger and subsidiary books shows where each entry finally lives.
Learn adjusting entries the structured way
Trusted by 50,000+ learners since 2012 · Hindi + English · Learn at your own pace
Start the ACCA Knowledge Level courseFrequently Asked Questions
Is accrued income an asset or a liability?
Accrued income is an asset. It represents income you have earned during the period but not yet received in cash — a claim on someone else, so it sits under current assets on the balance sheet. It becomes bank, not income, when the money finally arrives, because the income was already recognised when it was earned.
Is unearned revenue a liability?
Yes. Unearned revenue (deferred revenue or income received in advance) is a liability because you have taken the cash but still owe the goods or service. Under Ind AS 115 it is formally a contract liability. You move it into income gradually, as you perform the obligation, until the balance reaches zero.
What is the difference between accrued income and unearned revenue?
The difference is timing and side. Accrued income is earned first and received later, so it is an asset. Unearned revenue is received first and earned later, so it is a liability. One says the world owes you; the other says you owe the world. They sit in opposite corners of the earned-versus-received grid.
What journal entry records unearned revenue?
On receiving the advance, debit Bank and credit Unearned Revenue (a liability) — no income yet. As you deliver the service each period, debit Unearned Revenue and credit the relevant income account for the portion earned. By the end of the contract the liability is fully drained into income.
Why do accrued income and unearned revenue matter for exams and ACCA?
They test whether you truly understand the accrual concept rather than just recording cash. A single reversal of these entries throws off both profit and the balance sheet, which is exactly the kind of connected error examiners probe. Getting them right signals that you can match income to the period it belongs to.
.jpg)
.jpg)
