Journal Entry Rules for Income

Journal Entry for Recognition of Income

For Recording of journal entry for income or in other word recognition of income is subject to some conditions. These condition are listed below

·         Definition of Income.

·         Flow of associated benefit.

·         Reliable measurement of income.

Definition of Income

Journal entry for income shall not be recorded or recognized in the books of account unless and until financial item qualifies to be an income. Income basically is a gross flow of economic benefit, which would ultimately result in increase in equity.

Benefit associated with Income

Another important condition of recognition of income is flow of economic benefit to the business. Income journal entry shall be recorded only and only, if economic benefit is expected to flow to the business. For example credit sales made to an insolvent person shall not be recorded as income, because economic benefit is not expected in this case.           

                                                           

Reliable Measurement of Income

Another important condition for recording the journal entry for income is reliable measurement of income. The precise measurement of income is essential for recording the journal entry.

For example sales made to a party that sales price would be confirmed after one month due to some difficulty in costing of goods. Then sales shall not be recorded as income cannot be reliably measured.

Recognition of Income

Once income has satisfied all the three conditions as mentioned above, the income can be recorded or recognized in the books of account by using the debit & credit rule for income recognition i.e. an increase in income is debit and a decrease in income is credit.

For example a rental income from a building of PKR 200,000 shall be recorded as under

Date	Particular	Ledger Folio	Dr.	Cr.
01-05-2016	Cash		200,000
01-05-2016	Rent			200,000