Accounting When a customer pays in advance for a product or service such as a pr
ID: 2468809 • Letter: A
Question
Accounting When a customer pays in advance for a product or service such as a prepaid insurance policy, the business that sold that item will record the cash received as an asset and the future obligation to provide the item as a liability. Please give some thought to different business situations where the customers may pay in advance and provide an example here. 1. Using your example, which account is debited to record the payment received? Which account is credited? 2. When the business provides the product or service, which account is debited? Which account is credited? 3. What do we mean by the term “deferred revenue”? 4. How would these transactions be recorded under the cash basis of accounting? What are the benefits of recording the deferral under the accrual basis?
Explanation / Answer
Answer 1 The 'CASH' account is debited. ADVANCE FROM CUSTOMER' or 'DEFERRED REVENUE' account is credited. Answer 2 ADVANCE FROM CUSTOMER' or 'DEFERRED REVENUE' account is debited. SALES' account is credited. Answer 3 Deferred revenue is a liability because it refers to revenue that has not yet been earned but represents the product or services that are owed to the customer.Once the product or service is delivered over time , it is recognised as revenue on the income statement. Answer 4 Under cash basis of accounting , revenue is recognised in the Income statement when the cash is received from the customer. Answer 5 Benefits of recording the deferral under accrual basis, - revenue is recognised when goods are delivered or service is performed.So he tax liability been postponed till the time reveune is recognised.