What is the double entry for recording prepaid income?

The correct choice involves debiting the prepaid income account and crediting the income account. This reflects the accounting treatment for income that has been received in advance of the service being performed or the good being delivered.

When a business receives cash for a service or product that will be provided in a future period, it does not recognize that cash as revenue immediately. Instead, the business recognizes a liability because it is obliged to provide the service or product in the future. By debiting prepaid income, you are acknowledging that this amount received is not yet earned revenue; rather, it is a payment received in advance, which is why it's recorded as a liability. Crediting the income account recognizes that this cash has not yet translated into earned revenue, thus delaying the income recognition until the service or product is delivered.

Understanding this concept is crucial in financial accounting as it adheres to the revenue recognition principle, which states that income should only be recognized when it is earned, regardless of when payment is received. This ensures that financial statements accurately reflect the company's financial position and performance in accordance with accounting standards.