Why is "Treating accrued income as a liability" a common mistake in Adjustments for Accrued & Prepaid Income?

Why it happens: Applying the accrued-expense rule. How to avoid it: Accrued income is owed TO the business, so it is an ASSET (a current asset), unlike an accrued expense. Source: 9706 Examiner Reports

Why is "Treating income received in advance as an asset" a common mistake in Adjustments for Accrued & Prepaid Income?

Why it happens: Cash was received. How to avoid it: Income received in advance is owed BY the business (a service still to provide), so it is a LIABILITY. Source: 9706 Examiner Reports

Why is "Using the amount received as the income" a common mistake in Adjustments for Accrued & Prepaid Income?

Why it happens: Ignoring accrued income / advances. How to avoid it: Recognise the income EARNED this year: add accrued income, deduct amounts received in advance. Source: 9706 Examiner Reports

Why is "Adding income received in advance / deducting accrued income" a common mistake in Adjustments for Accrued & Prepaid Income?

Why it happens: Mixing up the two. How to avoid it: ADD accrued income (earned this year); DEDUCT income received in advance (earned next year). Source: 9706 Examiner Reports

Why is "Putting balances on the wrong side of the income account" a common mistake in Adjustments for Accrued & Prepaid Income?

Why it happens: Treating it like an expense account. How to avoid it: An income account is credit-natured: received and accrued income on the credit; the income (debit) is the balancing figure. Source: 9706 Examiner Reports

Why is "Omitting the accrued income / advance from the SOFP" a common mistake in Adjustments for Accrued & Prepaid Income?

Why it happens: Only adjusting the income. How to avoid it: Show accrued income as a current asset and income received in advance as a current liability. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Adjustments for Accrued & Prepaid Income

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Detailed Study Notes

Detailed notes on Adjustments to Draft Financial Statements for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Adjustments for Accrued & Prepaid Income — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

The income-side mirror of accruals and prepayments. Learn to adjust income (rent, commission or interest receivable) for amounts earned but not yet received (accrued income) and amounts received in advance, calculate the income to recognise this year, and show the balances correctly in the statement of financial position.

At a glance

Accrued income (owed to the business, earned not received): ADD to income; show as a current asset.
Income received in advance (received not yet earned): DEDUCT from income; show as a current liability.
The income recognised is the amount earned this year (matching/realisation), not the amount received.
Income = received + opening received in advance − opening accrued − closing received in advance + closing accrued.
It is the mirror image of accrued/prepaid expenses: the signs and asset/liability classifications are reversed.
Prepare the income account: the income to the statement of profit or loss is the balancing figure.
Examples: rent receivable, commission receivable, interest receivable.

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.5.1 — Calculate and record the adjustment needed and the effect on the financial statements in respect of accrued and prepaid income.
Prepare income accounts showing accrued income and income received in advance.
Show accrued income (asset) and income received in advance (liability) in the statement of financial position.

Recognising the income earned

Recognise the income earned this year, not the amount received.

Just as expenses are matched to the period, income is recognised in the period it is earned (matching/realisation), not when the cash is received.

Accrued income (owed to the business): the business has earned income (e.g. rent for a tenant) but not yet received it. Add it to the income (and show it as a current asset).
Income received in advance: the business has received cash for income it has not yet earned. Deduct it from the income (and show it as a current liability).

The full relationship: $\text{Income} = \text{Received} + \text{Opening received in advance} - \text{Opening accrued} - \text{Closing received in advance} + \text{Closing accrued}$

Example. Rent received $10,000; $700 of rent is owed to the business (accrued) at the year end → income = 10,000 + 700 = $10,700.

Recognise income earned this year, not cash received.
Accrued income (earned, not received): add; current asset.
Received in advance (received, not earned): deduct; current liability.
Income = received + opening adv − opening accrued − closing adv + closing accrued.

See the full worked example for adjustments for accrued & prepaid income →

The mirror image of expenses

Everything is reversed: accrued income is an asset; received in advance is a liability.

Accrued/prepaid income is the mirror image of accrued/prepaid expenses:

	Expenses	Income
Owed (this year)	Accrued expense → liability	Accrued income → asset
In advance	Prepaid expense → asset	Received in advance → liability
Effect on the SOPL	Adjusts the charge	Adjusts the income

The logic:

Accrued income is owed to the business → an asset (the business is a creditor).
Income received in advance is owed by the business (a service still to provide) → a liability.

So once you know whether an item is an expense or income, and whether it is owed or in advance, the side and classification follow.

Accrued income = asset (owed TO the business).
Income received in advance = liability (owed BY the business).
This is the reverse of accrued/prepaid expenses.
Decide expense vs income and owed vs in advance, then classify.

See the full worked example for adjustments for accrued & prepaid income →

Preparing the income account

The income to the SOPL is the balancing figure (an income account is credit-natured).

An income account (e.g. rent receivable) is credit-natured (income is a credit), so the balances sit opposite to an expense account.

Worked example — rent receivable: opening received in advance $400; received $9,600; closing accrued income $700.

Dr	$	Cr	$
Statement of profit or loss	10 700	Balance b/d (received in advance)	400
		Bank	9 600
		Balance c/d (accrued income)	700
	10 700		10 700
Balance b/d (accrued income)	700

Opening received in advance = credit balance b/d (a liability carried in).
Closing accrued income = balance c/d on the credit side; brought down as a debit balance (an asset).
The income ($10,700) is the balancing figure to the statement of profit or loss.

Income to the SOPL = the balancing figure of the income account.
Opening received in advance = credit b/d (liability); opening accrued = debit b/d (asset).
Closing accrued income: credit c/d → debit b/d (an asset).
Closing received in advance: debit c/d → credit b/d (a liability).

See the full worked example for adjustments for accrued & prepaid income →

The financial statements and effect of errors

Accrued income is an asset; received in advance is a liability — and errors misstate profit.

Statement of financial position:

Accrued income → a current asset (owed to the business).
Income received in advance → a current liability (a service still owed).

Statement of profit or loss: the income recognised (the balancing figure) — not the cash received.

Effect of errors:

Omitting accrued income (earned, not received): income too low → profit understated; and an asset is missing → net assets understated.
Omitting income received in advance: income too high → profit overstated; and a liability is missing → net assets overstated.

So, like expense adjustments, each error has a double effect and must be shown in both statements. The adjustments apply the matching/realisation concepts to give a true and fair view.

Accrued income = current asset; received in advance = current liability.
SOPL: recognise income earned, not cash received.
Omitting accrued income understates profit; omitting received-in-advance overstates it.
Each error affects both statements; applies matching/realisation.

See the full worked example for adjustments for accrued & prepaid income →

Quick recap

Recognise income earned this year (matching/realisation), not cash received.
Accrued income (earned, not received): add; current asset.
Income received in advance (received, not earned): deduct; current liability.
Income = received + opening adv − opening accrued − closing adv + closing accrued.
It is the mirror image of accrued/prepaid expenses (asset/liability reversed).
Omitting accrued income understates profit; omitting received-in-advance overstates it.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Accrued income: ADD to income; current ASSET (owed TO the business).
Income received in advance: DEDUCT from income; current LIABILITY (owed BY the business).
It is the MIRROR image of accrued/prepaid expenses.
Income to the SOPL = the balancing figure of the income account.

How it’s examined

Tested on Paper 2 and Paper 3 as part of preparing financial statements: adjust income (rent/commission/interest receivable) for accrued income and amounts received in advance, and show the balances in the SOFP. Examiner reports note candidates treating accrued income as a liability (it is an asset) and income received in advance as an asset (it is a liability).

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706 Paper 2 & Paper 3 past papers & mark schemes, 2022-2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-17.

Take this whole topic with you

Step-by-step worked examples — Adjustments for Accrued & Prepaid Income

Step-by-step solutions to past-paper-style questions on adjustments for accrued & prepaid income, written exactly the way a tutor would explain them at the board.

Question type:

1Income with accrued income (3 marks)
Getting startedMulti-step problem• 9706 Paper 2 style• accrued income, AO2
Question
Rent received during the year was $8,000. At the year end,$ 600 of rent was owed to the business. Calculate the rent receivable to be shown as income. (3 marks)
Step-by-step solution
1. Step 1
  Accrued income (earned, not received) is added: 8,000 + 600.
2. Step 2
  = $8,600 income in the statement of profit or loss.
3. Step 3
  The $600 accrued income is a current asset.
Answer
Rent receivable (income) = $8,600 (accrued income$ 600 is a current asset).
Examiner tip
Add accrued income; it is earned this year even though not yet received.
2Income received in advance (3 marks)
Getting startedMulti-step problem• received in advance, AO2
Question
Commission received during the year was $5,000, of which$ 400 relates to next year. Calculate the commission income for this year. (3 marks)
Step-by-step solution
1. Step 1
  Income received in advance is deducted: 5,000 − 400.
2. Step 2
  = $4,600 income in the statement of profit or loss.
3. Step 3
  The $400 received in advance is a current liability.
Answer
Commission income = $4,600 (received in advance$ 400 is a current liability).
Examiner tip
Deduct amounts received in advance; they are not yet earned (realisation).
3Classify income balances (4 marks)
Getting startedIdentify & classify• classification, AO1
Question
State whether each is a current asset or a current liability: (i) accrued income; (ii) income received in advance; (iii) a prepaid expense; (iv) an accrued expense. (4 marks)
Step-by-step solution
1. Step 1
  (i) Accrued income → current asset (owed to the business).
2. Step 2
  (ii) Income received in advance → current liability (owed by the business).
3. Step 3
  (iii) Prepaid expense → current asset.
4. Step 4
  (iv) Accrued expense → current liability.
Answer
(i) Asset; (ii) Liability; (iii) Asset; (iv) Liability.
Examiner tip
Accrued income is an asset; income received in advance is a liability (the reverse of expenses).
4Income with opening and closing balances (5 marks)
Building confidenceMulti-step problem• accrued income, AO2
Question
Rent receivable: opening received in advance $300; received during the year$ 11,000; closing accrued income $500. Calculate the rent receivable income for the year. (5 marks)
Step-by-step solution
1. Step 1
  Income = received + opening received in advance + closing accrued.
2. Step 2
  = 11,000 + 300 (now earned this year) + 500 (earned, not yet received).
3. Step 3
  = $11,800.
Answer
Rent receivable income = $11,800.
Examiner tip
The opening 'received in advance' becomes income this year; add the closing accrued income.
5Prepare the income account (5 marks)
Building confidenceMulti-step problem• income account, AO2
Question
Prepare the commission receivable account and find the income to the statement of profit or loss: opening received in advance $200; received$ 7,400; closing accrued income $600. (5 marks)
Step-by-step solution
1. Step 1
  Credit: balance b/d (received in advance) 200; bank 7,400; balance c/d (accrued income) 600 = 8,200.
2. Step 2
  Debit: the balancing figure to the statement of profit or loss = $8,200.
3. Step 3
  The $600 accrued income is brought down as a debit balance (an asset).
Answer
Income to the SOPL = $8,200 (= 7,400 + 200 + 600); accrued income$ 600 is an asset.
Examiner tip
An income account is credit-natured; the income is the debit balancing figure.
6Show the balances in the SOFP (4 marks)
Building confidenceIdentify & classify• SOFP, AO2
Question
At the year end a business has rent receivable accrued (owed to it) $700 and commission received in advance$ 300. State how each appears in the statement of financial position. (4 marks)
Step-by-step solution
1. Step 1
  Rent accrued income $700 → a current asset.
2. Step 2
  Commission received in advance $300 → a current liability.
3. Step 3
  Accrued income is owed to the business; income in advance is owed by it.
Answer
Accrued income $700 = current asset; income received in advance$ 300 = current liability.
Examiner tip
Accrued income is an asset; received in advance is a liability.
7Effect of omitting accrued income (5 marks)
StretchWord problem• effect, AO2
Question
A business omitted closing accrued income (rent owed to it) of $900. Explain the effect on the financial statements. (5 marks)
Step-by-step solution
1. Step 1
  Income is too low by $900 → profit understated by $900.
2. Step 2
  The accrued income (a current asset) is missing → current assets understated by $900.
3. Step 3
  The understated profit lowers capital by $900.
4. Step 4
  So net assets are understated.
5. Step 5
  It breaches the matching/realisation concepts (the income was earned this year).
Answer
Profit understated $900; current assets understated$ 900; capital understated $900 — breaching matching/realisation.
Examiner tip
Omitting accrued income understates profit and omits an asset.
8Effect of omitting received-in-advance (5 marks)
StretchWord problem• effect, AO2
Question
A business included all the commission it received as income, ignoring $500 received in advance for next year. Explain the effect on the financial statements. (5 marks)
Step-by-step solution
1. Step 1
  Income is too high by $500 → profit overstated by $500.
2. Step 2
  The income received in advance (a current liability) is missing → liabilities understated by $500.
3. Step 3
  The overstated profit raises capital by $500.
4. Step 4
  So net assets are overstated (liabilities too low / capital too high).
5. Step 5
  It breaches realisation — the $500 is not yet earned.
Answer
Profit overstated $500; current liabilities understated$ 500; capital overstated $500 — breaching realisation.
Examiner tip
Ignoring received-in-advance overstates profit and omits a liability.
9Work back to the amount received (5 marks)
StretchMulti-step problem• income account, AO2
Question
Rent receivable income for the year was $14,000. There was an opening accrued income of$ 600 and a closing accrued income of $900. Calculate the rent actually received during the year. (5 marks)
Step-by-step solution
1. Step 1
  Income = received − opening accrued + closing accrued.
2. Step 2
  14,000 = received − 600 + 900.
3. Step 3
  Received = 14,000 + 600 − 900 = $13,700.
Answer
Rent received = $13,700.
Examiner tip
Rearrange: received = income + opening accrued − closing accrued.
10Concept behind income in advance (4 marks)
StretchWord problem• realisation, AO3
Question
Explain, with reference to an accounting concept, why income received in advance is not all recognised in the year it is received. (4 marks)
Step-by-step solution
1. Step 1
  The realisation concept recognises income only when it is earned (the service is provided).
2. Step 2
  Income received in advance relates to next year's service, which has not yet been provided.
3. Step 3
  So that part is deducted from this year's income and carried forward as a liability (deferred income).
4. Step 4
  It is recognised as income next year, when it is earned (also supported by matching/prudence).
Answer
Realisation: recognise income only when earned; income in advance relates to next year, so it is a liability now.
Examiner tip
Name realisation and explain it relates to next year's (unearned) service.

Model Answers — Adjustments for Accrued & Prepaid Income

High-scoring sample answers for adjustments for accrued & prepaid income on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style3 marks
Q (3 marks). Rent received during the year was $9,000, and$ 800 of rent is still owed to the business at the year end. Calculate the rent receivable income and state where the $800 appears.
Model answer
Income = 9,000 + 800 = $9,800. The $800 accrued income is shown as a current asset in the statement of financial position.
Why this scores
Marking (point-based, 3). Add accrued income (1); income $9,800 (1); current asset (1).
Question 2
9706 Paper 2 style3 marks
Q (3 marks). Commission received during the year was $6,200, of which$ 500 relates to next year. Calculate the commission income and state where the $500 appears.
Model answer
Income = 6,200 − 500 = $5,700. The $500 received in advance is shown as a current liability in the statement of financial position.
Why this scores
Marking (point-based, 3). Deduct advance (1); income $5,700 (1); current liability (1).
Question 3
9706 Paper 2 style2 marks
Q (2 marks). State whether accrued income and income received in advance are current assets or current liabilities.
Model answer
Accrued income is a current asset (it is owed to the business). Income received in advance is a current liability (the business still owes the service).
Why this scores
Marking (point-based, 2). Accrued income = asset (1); received in advance = liability (1).
Question 4
9706 Paper 2 style5 marks
Q (5 marks). Rent receivable: opening received in advance $400; received during the year$ 12,000; closing accrued income $600. Calculate the rent receivable income for the year.
Model answer
Income = received + opening received in advance + closing accrued income = 12,000 + 400 + 600 = $13,000.

(The opening $400 received in advance is now earned this year; the closing $600 accrued income has been earned but not yet received.)
Why this scores
Marking (point-based, 5). Method (1); add opening advance $400 (1.5); add closing accrued$ 600 (1.5); income $13,000 (1).
Question 5
9706 Paper 2/3 style5 marks
Q (5 marks). Prepare the rent receivable account and find the income to the statement of profit or loss: opening accrued income $500; received by bank$ 10,200; closing received in advance $300.
Model answer
Rent receivable account

Dr $ Cr $
Balance b/d (accrued income) 500 Bank 10 200
Statement of profit or loss 9 400 Balance c/d (received in advance) 300
10 500...

Working: income = 10,200 − 500 (opening accrued, received this year) − 300 (closing received in advance) = $9,400 to the statement of profit or loss.
Why this scores
Marking (point-based, 5). Opening accrued income debit b/d $500 (1); bank credit$ 10,200 (1); closing received in advance c/d $300 (1); income$ 9,400 (2).
Question 6
9706 Paper 3 style6 marks
Q (6 marks). Commission receivable: opening accrued income $700; received during the year$ 15,000; closing accrued income $900. Calculate (a) the commission income for the year and (b) state how the closing accrued income appears in the statement of financial position.
Model answer
(a) Income = received − opening accrued + closing accrued = 15,000 − 700 + 900 = $15,200. (The opening $700 accrued income was earned last year but received this year, so it is deducted; the closing $900 is earned this year but not yet received, so it is added.)

(b) The $900 closing accrued income is shown as a current asset in the statement of financial position.
Why this scores
Marking (point-based, 6). Deduct opening accrued $700 (1.5); add closing accrued$ 900 (1.5); income $15,200 (2); current asset (1).
Question 7
9706 Paper 3 style5 marks
Q (5 marks). A business included all the rent it received as income, ignoring $750 of rent received in advance for next year. Explain the effect of this on the financial statements.
Model answer
By including the $750 received in advance, the rent income is too high by $750, so profit is overstated by $750.

In the statement of financial position, the income received in advance (a current liability) is missing, so current liabilities are understated by $750. The overstated profit raises capital, so capital (net assets) is overstated by $750.

The error therefore overstates both profit and net assets by $750, breaching the realisation concept — the $750 has not yet been earned, so it should be carried forward as a liability and recognised next year.
Why this scores
Marking (point-based, 5). Income/profit overstated $750 (2); liability missing (1.5); capital overstated / realisation (1.5).
Question 8
9706 Paper 3 style5 marks
Q (5 marks). Interest receivable income for the year was $3,000. There was an opening accrued income of$ 200 and a closing received in advance of $150. Calculate the interest actually received during the year.
Model answer
Income = received − opening accrued − closing received in advance 3,000 = received − 200 − 150 Received = 3,000 + 200 + 150 = $3,350.

(Check: 3,350 − 200 (opening accrued received this year) − 150 (received in advance) = 3,000 ✓.)
Why this scores
Marking (point-based, 5). Set up the relationship (2); rearrange for received (2); $3,350 (1).
Question 9
9706 Paper 2/3 style4 marks
Q (4 marks). Explain, with reference to an accounting concept, why income received in advance is treated as a liability rather than as income in the year it is received.
Model answer
The realisation concept recognises income only when it has been earned — that is, when the goods or services have been provided.

Income received in advance is payment for a service the business has not yet provided (it relates to next year). Because it has not been earned, it cannot be recognised as income this year. Instead it is carried forward as a liability (deferred income), reflecting the business's obligation to provide the service, and is recognised as income next year when it is earned. This (with matching) ensures each year's profit reflects only what was genuinely earned.
Why this scores
Marking (point-based, 4). Realisation — income when earned (~2); received in advance relates to a future service, so a liability now (~2).
Question 10
9706 Paper 3 style6 marks
Q (6 marks). Explain how the treatment of accrued income and income received in advance mirrors, but is opposite to, the treatment of accrued expenses and prepaid expenses.
Model answer
Both pairs apply the matching concept, recognising income or expense in the period it relates to — but the asset/liability classification is reversed:

An accrued expense is owed by the business → a current liability; an accrued income is owed to the business → a current asset.

A prepaid expense is paid in advance by the business → a current asset; income received in advance is received before earning it → a current liability.

In the statement of profit or loss, expense adjustments change the charge (add accruals, deduct prepayments), while income adjustments change the income (add accrued income, deduct amounts received in advance).

So the logic is the same — match to the period — but because income is owed to/received by the business while expenses are owed by/paid by it, the asset and liability sides are swapped.
Why this scores
Marking (point-based, ~6). Both apply matching (~1); accrued expense liability vs accrued income asset (~2); prepaid expense asset vs income in advance liability (~2); SOPL effect (~1).

Dr	$	Cr	$
Balance b/d (accrued income)	500	Bank	10 200
Statement of profit or loss	9 400	Balance c/d (received in advance)	300

	10 500...

Key Definitions and Keywords — Adjustments for Accrued & Prepaid Income

Definitions to memorise and the exact keywords mark schemes credit for adjustments for accrued & prepaid income answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Accrued income
Examiner keyword
Income earned but not yet received at the year end; added to income and shown as a current asset.
Income received in advance
Examiner keyword
Income received but not yet earned at the year end; deducted from income and shown as a current liability (deferred income).
Income recognised
Examiner keyword
The amount of income earned in the year (matching/realisation) — the balancing figure of the income account, not the amount received.
Realisation concept
Examiner keyword
The concept requiring income to be recognised when it is earned (the service provided), not when cash is received.
Income accounts (receivable)
Accounts such as rent receivable, commission receivable and interest receivable, which are adjusted for accrued income and income received in advance.
Mirror of expenses
Examiner keyword
Accrued income is an asset (vs an accrued expense, a liability); income received in advance is a liability (vs a prepaid expense, an asset).

Common Mistakes and Misconceptions — Adjustments for Accrued & Prepaid Income

The traps other students keep falling into on adjustments for accrued & prepaid income questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Treating accrued income as a liability
9706 Examiner Reports
Why it happens
Applying the accrued-expense rule.
How to avoid it
Accrued income is owed TO the business, so it is an ASSET (a current asset), unlike an accrued expense.
✕Treating income received in advance as an asset
9706 Examiner Reports
Why it happens
Cash was received.
How to avoid it
Income received in advance is owed BY the business (a service still to provide), so it is a LIABILITY.
✕Using the amount received as the income
9706 Examiner Reports
Why it happens
Ignoring accrued income / advances.
How to avoid it
Recognise the income EARNED this year: add accrued income, deduct amounts received in advance.
✕Adding income received in advance / deducting accrued income
9706 Examiner Reports
Why it happens
Mixing up the two.
How to avoid it
ADD accrued income (earned this year); DEDUCT income received in advance (earned next year).
✕Putting balances on the wrong side of the income account
9706 Examiner Reports
Why it happens
Treating it like an expense account.
How to avoid it
An income account is credit-natured: received and accrued income on the credit; the income (debit) is the balancing figure.
✕Omitting the accrued income / advance from the SOFP
9706 Examiner Reports
Why it happens
Only adjusting the income.
How to avoid it
Show accrued income as a current asset and income received in advance as a current liability.

Adjustments for Accrued & Prepaid Income

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Income with accrued income (3 marks)

2Income received in advance (3 marks)

3Classify income balances (4 marks)

4Income with opening and closing balances (5 marks)

5Prepare the income account (5 marks)

6Show the balances in the SOFP (4 marks)

7Effect of omitting accrued income (5 marks)

8Effect of omitting received-in-advance (5 marks)

9Work back to the amount received (5 marks)

10Concept behind income in advance (4 marks)

Accrued income

Income received in advance

Income recognised

Realisation concept

Income accounts (receivable)

Mirror of expenses

✕Treating accrued income as a liability

✕Treating income received in advance as an asset

✕Using the amount received as the income

✕Adding income received in advance / deducting accrued income

✕Putting balances on the wrong side of the income account

✕Omitting the accrued income / advance from the SOFP