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Category: Category - Revenue or Income

If the question is focused on a “Revenue or Income” or is about “Revenue” in general, please use this category.

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  1. This answer was edited.

    Before I answer this question of your's it would be beneficial for you to have clarity over the concept of Deferred Revenue. Meaning of a Deferred Revenue Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before renderingRead more

    Before I answer this question of your’s it would be beneficial for you to have clarity over the concept of Deferred Revenue.

    Meaning of a Deferred Revenue

    Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services.

    The concept of deferred revenue applies only if an entity follows the Accrual System of Accounting. If the entity follows the cash system of accounting it’s of no relevance as the entire amount received becomes income in the year of receipt.

    Whether the Deferred Revenue is a Liability?

    The answer to this question is  “Yes” it is a liability. Even though you got the answer that it is a liability but I believe a part of the question remains unanswered i.e why is it a liability?

    The logic for the same is- Since the entity has already received the amount even before rendering services or delivering goods the entity or a company has a sort of an obligation to deliver the goods or render such services at the predetermined future date. Failing which it may be liable to face legal proceedings or legal actions. Hence, it becomes a liability on a part of the entity to honour such a transaction.

    When the entity receives the amount before delivering goods or rendering services that amount is recorded as a “Liability” and once the goods are delivered or services are rendered the liability is reduced and the entity records it as a “Revenue”.

    For Example,

    In the case of an Educational Institutes like the Universities, Coaching Institutes etc. it charges fees even before the term commences. In such a case the entity has not yet rendered service of imparting education hence, the tuition fees so received shall become a deferred revenue and shall be recorded as a liability at the time of the receipt and at as and when it’s accrued it shall be recorded as revenue.

    Journal Entry for the same shall be:

    At the time of receipt of Tuition Fees-

    Cash  A/c Debit Debit the Increase in an Asset.
    Deferred Revenue A/c Credit Credit the Increase in a Liability.

    And at the time of recording revenue on monthly basis every month-

    Deferred Revenue A/c Debit Debit the Decrease in a Liability.
    Tuition Fees Earned A/c Credit Credit the Increase in an Income.

    Deferred Revenue is Presented in the Balance Sheet as –

    Deferred Revenue in Balance Sheet

    Conclusion

    Deferred revenue at the time of early receipt of the amount is recorded as a liability and at the time of actual income recorded as revenue in the income statement.


    Aastha Mehta.

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  1. This answer was edited.

    Purchase return is credited in the books of accounts. To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship. Rules of accounting To apply these rules of accounting we first need to analRead more

    Purchase return is credited in the books of accounts.

    To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship.

    Rules of accounting

    To apply these rules of accounting we first need to analyze the type of account in question. An account is said to be nominal when it is related to the incomes, gains, losses, or expenses of a business. The goods purchased on a cash/credit basis by the business are returned to the seller which in turn reduces the accounts payables and is a gain for the organization, hence purchase returns is a nominal account.

    Golden or the traditional rules of accounting

    Firstly, we shall consider the golden rules of accounting for a nominal account to determine why purchase return a/c has a credit balance. The rule is as follows:

    “Debit all expenses and losses,

    Credit all incomes and gains.”

    Example

    ABC Ltd. purchased raw materials from a supplier worth 60,000 on a cash basis. After complete scanning, some defects were identified and the company decided to return the damaged materials worth half of the total value. The journal entries in the books of ABC Ltd. are as follows:

     

    Purchase a/c

     

    Debit

     

    60,000

    Debit all expenses and losses
     

    To cash a/c

     

    Credit

     

    60,000

    Credit what goes out

    (being goods purchased from the supplier)

     

    Cash a/c

     

    Debit

     

    30,000

    Debit what comes in
     

    To Purchase return a/c

     

    Credit

     

    30,000

    Credit all incomes and gains

    (being goods returned to the seller)

    Note: A debit of 60,000 in the Purchase a/c and a credit of 30,000 in Purchase return a/c portrays that ABC Ltd. had a net purchase of 30,000. (60,000 – 30,000)

    Modern rules of accounting

    The modern rule is as follows:

    Type of account Debit Credit
    Expense account Increase Decrease

    Example

    XYZ Ltd. purchased goods from Mr. A, for 40,000 on a credit basis. Due to a lack of quality goods worth 10,000 were returned. The journal entries in the books of XYZ Ltd. are as follows

     

    Purchase a/c

     

    Debit

     

    40,000

    Debit the increase in expenses
     

    To Mr. A’s a/c

     

    Credit

     

    40,000

    Credit the increase in liability

    (being goods purchased on credit basis)

     

    Mr. A’s a/c

     

    Debit

     

    10,000

    Debit the decrease in liability
     

    To Purchase return a/c

     

    Credit

     

    10,000

    Credit the decrease in expenses

    (being goods returned to the supplier)

    Note: A debit of 40,000 in the Purchase a/c and a credit of 10,000 in the Purchase return a/c shows that XYZ Ltd. had a net purchase worth 30,000. (40,000 – 10,000)

    Hope this helps.

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  1. This answer was edited.

    Sure, John, firstly I would like to explain the meaning of net credit sales before moving onto the formula of net credit sales. To make the concept easy and transparent, I would like to add a practical example for better understanding.  Net Credit Sales Credit sales refer to the total value of salesRead more

    Sure, John, firstly I would like to explain the meaning of net credit sales before moving onto the formula of net credit sales. To make the concept easy and transparent, I would like to add a practical example for better understanding. 

    Net Credit Sales

    Credit sales refer to the total value of sales which an organization (or) company makes on credit. If the company offers any discount to its customers on the credit sale of goods (or) if sales returns occur, then such amounts must be deducted from the total value of credit sales to arrive at Net credit sales figure.

    In simple terms, net credit sales refer to the total revenue generated by the company when it sells goods and services to its customers on credit, reducing the amount of sales allowance and sales return from the total credit sales.

    Net Credit Sales Formula

    Net Credit Sales = Total Credit Sales – Sales Returns – Discount on Sales

    Example-

    Apple Inc furnishes you the following sales information. Calculate the value of Net credit sales.

    Particulars Amount
    Total Sales 4,50,000
    Cash Sales 1,50,000
    Credit Sales 3,00,000
    Goods Returned by Customers 1,00,000
    Sales Allowance/Discount 60,000

    Net Credit Sales = Credit Sales – Sales Returns – Discount allowed on Sales

    = 3,00,000 – 1,00,000 – 60,000

    = 1,40,000

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  1. This answer was edited.

    Before I give you the examples of deferred revenue I would first like to explain what deferred revenue means. Meaning of Deferred Revenue Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services. ExRead more

    Before I give you the examples of deferred revenue I would first like to explain what deferred revenue means.

    Meaning of Deferred Revenue

    Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services.

    Examples of Deferred Revenue

    1. Yearly Subscription to a Magazine: An entity engaged in publishing magazines generally charges a yearly subscription for sending the magazines at a predetermined time intervals to the subscribers. Such an entity charges a yearly subscription the amount received is a perfect example of deferred revenue. The Accounting Treatment for the Same is
      The entity will first record deferred revenue as

      Cash  A/c Debit Debit the Increase in an Asset.
      Deferred Revenue A/c Credit Credit the Increase in a Liability.

      At the time of actual accrual of revenue i.e at the time of recording earned revenue-

      Deferred Revenue A/c Debit Debit the Decrease in a Liability.
      Subscription Revenue A/c Credit Credit the Increase in an Income.
    2. Other Subscriptions: another example is the subscription charged by Amazon, Netflix, Hotstar etc. for getting access rights to download or watch the content on the website or such app. The charges are generally on a yearly or quarterly or monthly basis and thus in case if the customer buys a quarterly or a yearly plan such revenue is a deferred revenue since the services are not yet availed by the users.The company shall account such receipts and revenue as:
      when it receives such subscription amount-

      Cash  A/c Debit Debit the Increase in an Asset.
      Deferred Revenue A/c Credit Credit the Increase in a Liability.

      and when such revenue is accrued i.e customer has availed such service-

      Deferred Revenue A/c Debit Debit the Decrease in a Liability.
      Subscription Charges Earned A/c Credit Credit the Increase in an Income.
    3. Software license Fees: A software company generally charges the software license fees for using the entity’s software on the yearly or semi-annually or quarterly basis. Such fees are charged even before giving access rights. Hence, the company defers revenue. Accounting Treatment in the books of software company shall be:
      At the time of receipt of the license fee

      Cash  A/c Debit Debit the Increase in an Asset.
      Deferred Revenue A/c Credit Credit the Increase in a Liability.

      At the time of recognising revenue which may be monthly or quarterly or such other basis as per the entity’s policy-

      Deferred Revenue A/c Debit Debit the Decrease in a Liability.
      Software License Fees Earned A/c Credit Credit the Increase in an Income.
    4. Educational Institute: Coaching centres or the universities for higher education generally charge the course fee before commencement of each term. Thus the amount is received by such institute even before the services of imparting education has been rendered, This is a perfect example of deferred revenue. Such Educational Institute shall account this transaction as:
      At the time of receipt of such fee-

      Cash  A/c Debit Debit the Increase in an Asset.
      Deferred Revenue A/c Credit Credit the Increase in a Liability.

      and at the time of revenue recognition-

      Deferred Revenue A/c Debit Debit the Decrease in a Liability.
      Tuition Fees Earned A/c Credit Credit the Increase in an Income.

      I have tried giving as many examples as I could relate. I hope this answers your question.


      Aastha Mehta

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  1. This answer was edited.

    Meaning of Fees Earned Fees earned signifies the revenue an entity that is generally engaged in rendering services to its clients generates during the reporting period. When an entity deals in both goods and services it charges fees for the part of services rendered and for the goods delivered it chRead more

    Meaning of Fees Earned

    Fees earned signifies the revenue an entity that is generally engaged in rendering services to its clients generates during the reporting period. When an entity deals in both goods and services it charges fees for the part of services rendered and for the goods delivered it charges the predetermined price. It generally forms a major part of revenue in the service industry.

    Few Instances wherein an entity record the amount earned as fees:

    For Services Rendered –

    • Consultancy
    • Consultancy on Taxation Related Matters
    • Auditing and Assurance
    • Architectural Services
    • Accountancy and Other Legal Services.

     

    Both Goods and Services-

    • Manufacturing and repairs
    • Trading in goods and consultancy
    • Goods and transport

     

    When a combined amount is received for the cases wherein both goods and services are rendered one has to record fees earned proportionately.

    Whether it shall be Credited or Debited?

    Fees Earned shall be credited as fees form a part of the revenue and as per modern rule of accounting, the increase in an income should be “Credited”.

    Even if you follow the golden rule of accounting there will be no change in the answer this is because as per golden rule about a nominal account debit the expenses and losses and credit all incomes and gains.

    Accounting treatment

    If an entity follows Cash System of Accounting entire amount received shall form part of the fees earned. One need not distinguish fees based on actual earnings in the accounting period.

    Journal Entry for the same shall be:

    Bank A/c Debit Debit the increase in an asset.
    To Fees Earned A/c Credit Credit the increase in income.

    The accounting treatment in an income statement is given below-

    Fees received in income statement

    If an entity follows Accrual System of Accounting only that part of the receipts shall form a part of fees earned which has been accrued in the reporting period.

    The amount if received in advance shall be recorded as a liability and if received less then such a difference shall be recorded as sundry debtors under current assets.

    Journal Entry for the same shall be:

    Out of the total revenue, a part of fees is received in advance-

    Bank A/c Debit Debit the increase in an asset.
    To Advance Fees A/c Credit Credit the increase in liability.
    To Fees Earned A/c Credit Credit the increase in income.

    It appears in the income statement and balance sheet as –

    Advance Fees received in balance sheet

    Fees Earned in Income Statement

    In case if only part of fees earned is received in a reporting period:

    Bank A/c Debit Debit the increase in an asset.
    Sundry Debtors A/c Debit Debit the increase in an asset.
    To Fees Earned A/c Credit Credit the increase in income.

    It appears in the income statement and balance sheet as –

    Treatment of Fees in case of Accrual System

    Fees earned but not received

    As it can be seen in all of the cases above that fees earned being an income is credited.


    Aastha

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  1. This answer was edited.

    When a sum of money is received by the company before providing the goods or services, it is known as an advance received from the customer. It could be due to many reasons such as demand for security deposit by the landlord, payment security for purchasing goods in bulk, confirmation of the order,Read more

    When a sum of money is received by the company before providing the goods or services, it is known as an advance received from the customer. It could be due to many reasons such as demand for security deposit by the landlord, payment security for purchasing goods in bulk, confirmation of the order, etc. It can also be referred to as Unearned Income or Deferred Revenue. 

    No, advance received from a customer is not treated as a revenue. It is treated as a current liability, according to the accrual basis of accounting, because the amount is not yet earned. It is recorded on the liabilities side of the balance sheet until an invoice is sent to the customer. After the customer is billed or invoiced, the advance received shown on the liabilities side of the balance sheet is removed and recorded as a revenue. Once the revenue is earned, there will be a decrease in liability by that amount and an increase in the revenue.

    Example

    Mr. K ordered cellphones in bulk from XYZ Ltd. and made an advance payment of 40,000 on the 5th of May. When the order was ready an invoice was sent to Mr. K on the 5th of June of the same financial year. The journal entries in the books of XYZ Ltd. are as follows:

    • 5 May Cash a/c Debit 40,000 Debit the increase in asset
      To Mr. K’s advance a/c Credit 40,000 Credit the increase in liability

    (being advance received from the customer)

    • 5 June Accounts Receivable a/c Debit 40,000 Debit the increase in asset
      To Revenue a/c Credit 40,000 Credit the increase in revenue

    (being customer invoiced

    • 5 June Mr. K’s advance a/c Debit 40,000 Debit the decrease in liability
      To Accounts Receivable a/c Credit 40,000 Credit the decrease in asset

    (being Mr. K’s advance account cleared)

    Placement in the Income Statement

    (Extract of Income Statement)

    revenue in is

    Hope this helps.

     

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  1. This answer was edited.

    What is Rent Received in Advance? It's an amount received by the landlord from his tenant before such tenant has availed the benefits from the property taken on rent. It's an income received in advance. Income received in advance refers to the amount received by a person or an entity before renderinRead more

    What is Rent Received in Advance?

    It’s an amount received by the landlord from his tenant before such tenant has availed the benefits from the property taken on rent. It’s an income received in advance.

    Income received in advance refers to the amount received by a person or an entity before rendering services or transfer of title to goods.

    For Example,

    A landlord may have the policy to charge the last month’s rent in advance for his convenience to cover himself from loss of income on the expiry of the lease term. A lot of landlords across the globe follow this policy.

    Whether it is Taxable?

    The answer to this question is that it depends. It depends on the accounting policy an entity or a person follows.

    If a person follows the Accrual System of Accounting then the rent received in advance shall be treated as a liability in the year of receipt and it will be taxable in the year of accrual.

    The image shown below is the perfect example of the same:

    Advance rent when accrual system is followed

    However, If a person follows Cash System of Accounting then such rent received shall be treated as an income in the year of receipt and it would be taxable in the year of receipt itself.

    The image shown below explains the same:

    Rent in Advance treatment in Profit and Loss Account when one follows cash system of accounting.

    The accounting treatment in each of the case shall be:

    In the Accrual System of Accounting

    Cash A/c                                           Dr. Asset Debit the increase in an asset.
    To Rent Received in Advance A/c Liability Credit the increase in liability.

    In the above journal entry, it is reflected that rent will not be recorded in the income statement i.e it will be taxable in the year of accrual and so it shall be the taxable income in the next accounting period.

     In Cash System of Accounting

    Cash A/c                                            Dr. Asset Debit the increase in an asset.
    To Advance Rent Income A/c Income Credit the increase in income.

    In this case, it is reflected from the above journal entry since the cash system is followed the rent is recorded as an income and since it will be reflected in an income statement it is a taxable income in the year of receipt.


    Aastha Mehta

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  1. This answer was edited.

    In simple words, income received in advance is treated as a current liability because the income that has been received by the company before its due date, is not yet earned and the company is obliged to deliver the purchased goods or services in the future. Assume that you have received an amount fRead more

    In simple words, income received in advance is treated as a current liability because the income that has been received by the company before its due date, is not yet earned and the company is obliged to deliver the purchased goods or services in the future. Assume that you have received an amount from a customer, for the goods or services that you will provide in the future, therefore, in the current financial period it is a liability for your company. It can be referred to as Deferred revenue, Deferred income, or Unearned income.

    Example

    XYZ Ltd. has received 40,000 from a customer in March for goods that will be delivered in April.

    XYZ Ltd. will debit the Cash a/c for 40,000 and credit the Deferred Revenue a/c for 40,000. On the 31st of March, the balance sheet of XYZ Ltd. shall include 40,000 in the cash of their company and record the deferred revenue of 40,000 under current liabilities.

    The journal entries to be recorded are as follows:

    March Cash a/c  Debit 40,000 Debit the increase in asset
      To Deferred Revenue a/c Credit 40,000 Credit the increase in liability

    (being income received in advance)

    April Deferred Revenue a/c Debit 40,000 Debit the decrease in liability
       To Sales Revenue a/c Credit 40,000 Credit the increase in revenue

    (being  goods sold to the customer)

    Placement in the balance sheet

    (Extract of the balance sheet)

    balance sheet

    Hope this helps.

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  1. Is Income debit or credit? Income is credited. Now, let me help you understand why and how is income credited & not debited. Why and How is Income credited? The account of expenses, losses, incomes, and gains are called as Nominal accounts. So, to ascertain the treatment of income, we need to knRead more

    Is Income debit or credit?

    Income is credited.

    Now, let me help you understand why and how is income credited & not debited.

    Why and How is Income credited?

    The account of expenses, losses, incomes, and gains are called as Nominal accounts. So, to ascertain the treatment of income, we need to know both the Golden rules and Modern rules of accounting for nominal accounts.

    1. Golden rules

    First, we will interpret why income is credited correlating it with the golden rules of nominal account along with an example. Golden rules state-

    Debit all Expenses and Losses & Credit all Incomes and Gains

    This is the reason why income is always to be credited.

    Example

    Professional fees charged by Deloitte Inc. for executing an audit of Pepsico Inc. 10,00,000.

    The journal entry for this transaction in the books of Deloitte Inc. will be-

    Pepsico Inc. A/c Debit 10,00,000 Personal A/c Debit the receiver of service
     To Professional fees A/c Credit  10,00,000 Nominal A/c Credit all incomes and gains

    The above journal entry shows that professional fees is the income for Deloitte Inc. Therefore, it has been credited.

    2. Modern rules

    Now, we will ascertain the reason why income is credited correlating it with the modern rules with the help of an example.

    Modern rules of accounting states-

    Credit the increase in Income

    Example

    Mr. Charles received rent 60,000 in cash from its tenant.

    The journal entry for this transaction in the books of Mr.Charles will be-

    Cash A/c Debit 60,000 Debit the increase in asset
     To Rent received A/c Credit  60,000 Credit the increase in income

    The above entry shows an increase in the income of Mr. Charles by receiving rent from its tenant.

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  1. Meaning of Income received in advance It refers to an income received in advance by the entity for goods or services which have not been rendered in the current accounting period. The advance income received relates to the future accounting period. It is a personal account and presented on the liabiRead more

    Meaning of Income received in advance

    It refers to an income received in advance by the entity for goods or services which have not been rendered in the current accounting period. The advance income received relates to the future accounting period. It is a personal account and presented on the liability side of the balance sheet.

    Income received in advance includes-

    1. Commission received in advance
    2. Rent received in advance
    3. Professional fees received in advance
    4. Premium received in advance

    Taxable or not?

    Taxability of Income received in advance depends on the method of accounting (Accrual method or Cash method) followed by an entity.

    So, let me help you understand the taxability considering both the approaches with an example each.

    1. Entity follows accrual method

    If accrual system of accounting is followed then income received in advance will be not be taxed in the period of receipt. It will be taxed in the accounting period to which it relates.

    For Example,

    In the month of December 20×1, Mr. Michael received professional fees in advance 50,000 which relates to the month of January 20×2.

    So, in this case, professional fees received in advance 50000 will not be taxed in the accounting period Jan-Dec 20×1. It will be taxed in the period Jan-Dec 20×2, as it belongs to January 20×2.

    2. Entity follows cash method

    If cash system of accounting is followed then income received in advance will be taxed in the period of receipt itself.

    For Example,

    Ms. Alexa received commission in advance 25,000 in the month of December 20×5, but the same relates to the month of January 20×6.

    So, in this case, the commission received 25,000 will be taxed in the accounting period Jan-Dec 20×5 itself. Eventhough it relates to a future accounting period ie. Jan-Dec 20×6, it is of no concern here, as cash system of accounting is followed.

    Conclusion

    We can conclude,

    Method of accounting

    Period of taxability

    Accrual method Period to which advance income relates
    Cash method Period of receipt of advance income

     

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  1. This answer was edited.

    Before directly diving into the question asked-Is income received in advance a liability or an asset? I will make you equipped with the meaning of the word “Income received in advance”. Meaning of "Income received in advance" Income received in advance refers to an income that has been received by tRead more

    Before directly diving into the question asked-Is income received in advance a liability or an asset? I will make you equipped with the meaning of the word “Income received in advance”.

    Meaning of “Income received in advance”

    Income received in advance refers to an income that has been received by the entity in the current accounting period but it actually relates to the future accounting period. The entity has just received the income but has not earned it yet. It is also known as Unearned Income.

    The entity receiving the income in advance still has an obligation to render the goods or services in the next accounting period, corresponding to the income received. Only after the entity renders the goods or service, the transaction will be considered as complete. So, because of this reason, income received in advance is certainly considered to be a liability.

    As per the accrual system of accounting and to present the true and fair financial position of the entity, income received is to be recorded in the books of accounts, irrespective of when the actual goods or services are provided. So, income received in advance is recorded as a liability in the current accounting period.

    Income received in advance includes

    • Rent received in advance
    • Commission received in advance
    • Professional fees received in advance
    • Premium received in advance, etc.


    From the meaning of the word “Income received in advance” itself, we can conclude that it is a liability and not an asset.

    Treatment in Financial Statements

    Income received in advance is shown in both the Balance Sheet and Profit and Loss account.

    Financial Statement Treatment
    Profit and Loss account Reduced from the respective income on the credit side of profit and loss account
    Balance Sheet Presented as a liability in the balance sheet under the head “Current Liabilities”

    A snippet of the balance sheet has been attached to show the presentation of Income received in advance.

    Income received in advance presented in balance sheet

    Conclusion

    Income received in advance is a liability and not an asset.

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