The adjustment to be made for income received in advance is:
Correct answer: B. Deduct income received in advance from respective income and show it as a liability
- A. Add income received in advance to respective income and show it as a liability
- B. Deduct income received in advance from respective income and show it as a liability
- C. Add income received in advance to respective income and show it as asset
- D. Deduct income received in advance from respective income and show it as an asset in the Balance Sheet
Explanation
Income received in advance has not yet been earned, so it is deducted from the recorded income and shown as a liability until the related service is provided. Treating it as an asset would reverse its accounting nature.
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About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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