Prepaid income

Prepaid income
See also

Prepaid Income (known also as unearned revenue) is an accounting idea that refers to a payment that has been received, but the asset has not yet been fully delivered. In other words, prepaid income is the revenue received in advance but which is not yet earned. From the side of the company, it can be defined as the one-off payment for the asset/goods/ service that will be delivered in the future or over time (funds received from a customer prior to the provision of goods or services)[1].

Prepaid Income is found on the Balance Sheet of a company[2]. It has to be considered as a liability (as it is something which is owed since the seller has not delivered them yet), either with its own section or under Other Current Liabilities. As soon as the goods or services has been provided, the liability is cancelled and the funds are recorded as a revenue instead[3]. In most of the cases, the prepaid income concept is seen in businesses that require prepayment for the manufacture of custom goods. It is not accurate in other industries, such as retailing, where payment is always made at the time of sale or later.

What is important, income must be recorded in the accounting period in which it is earned. As a consequence, prepaid income must not be shown as income in the accounting period in which it is received but instead it must be presented as such in the subsequent accounting periods in which the services or obligations in respect of the prepaid income have been proceeded.

Prepaid Income Tax Explanation[edit]

In accounting, Prepaid Income Tax is recognized as an asset listed on the balance sheet that constitutes taxes that have been already paid despite not yet having been incurred. It is also called a deferred income tax asset. Prepaid income are generally taxable under the federal income tax law[4].

Prepaid income tax is recognized as a form of prepaid expense. The most usual situation when prepayment on income taxes occurs is because of the over-estimation of tax deposits. In such a case, taxes are estimated from the financial records of the previous year. After the estimation, taxes are paid. Then, when the year-end taxes are found to be less than the taxes paid earlier, prepayment on income taxes has occurred. This prepayment can create one of two results. Either it results in a tax refund or the credit written off towards the tax liability of the next period[5].

There is one great difference between prepaid income tax and a deferred tax asset.

  • Prepaid income tax within one year
  • Deferred income tax asset can occur for a period of longer than one year.

Often, prepaid income taxes are the result of poor assumptions. Generally, company controllers prefers to overestimate the needed tax deposits.

Footnotes[edit]

  1. Newton G, Liquerman R (2012)
  2. Thakkar V (2014)
  3. Dodge M, Fleming C (2012)
  4. Matheny E (2018)
  5. Murphy K, Higgins M (2009)

References[edit]

Author: Weronika Włodarska