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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/cDebitDebit the Increase in an Asset.
    Deferred Revenue A/cCreditCredit the Increase in a Liability.

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

    Deferred Revenue A/cDebitDebit the Decrease in a Liability.
    Tuition Fees Earned A/cCreditCredit 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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    In the business world, the terms "Debt" and "Liability" are used interchangeably and are understood to be the same. But in reality, they differ. Debt Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date. For Example, Term loans acceptedRead more

    In the business world, the terms “Debt” and “Liability” are used interchangeably and are understood to be the same. But in reality, they differ.

    Debt

    Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date.

    For Example,

    • Term loans accepted from a bank or financial institutions for business expansion
    • Car loan, Home loan, Education loan

    Liability

    Liability is an obligation to render goods or services or an economic obligation to be discharged off at a future date.

    For Example,

    • Outstanding payment to suppliers of raw materials
    • Outstanding Expenses – accrued rent, outstanding professional fees, outstanding electricity expenses, unpaid salary, etc
    • Income received in advance – rent received in advance, commission received in advance, etc
    • Bills payable
    • Debts accepted by an entity

    Key differences between Debt and Liability

    Now, let me help you understand the differences between the two terms discussed above, debt and liability.

    Particulars

    Debt

    Liability

    1. Narrow/Broad aspectDebt is an integral part of liability. It is a type of liability.Liability is a broader term and it includes debt and other payables.
    2. Repayment modeDebt can be repaid back only in cash.Liabilities other than debt can be settled by rendering goods or services or by paying cash.
    3. OccurrenceDebt does not arise on a daily basis. It results only when an entity borrows money from another party.Other liabilities arise during the course of the day to day operations of the business.
    4. Formal agreementDebt involves a formal agreement between the borrower and the lender.Liabilities apart from debt may not involve such a formal agreement between the parties.
    5. UtilizationDebt helps entities for business expansion and diversification.Liabilities help entities conduct their daily business functions and processes.
    6. Interest paymentThe repayment of debt involves payment of interest along with the principal amount.Discharge of other liabilities may not involve payment of interest along with the actual amount of liability.
    7. Option of installmentsDebt repayment usually provides an option of payment in installments.Liabilities settlement may not provide such an option to the borrower.

    Conclusion

    All debts are liabilities, but not all liabilities are debts.

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  1. Accumulated Depreciation Depreciation is a wear and tear of an asset due to efflux of time and various other factors. It's basically an allocation of the cost of a tangible asset over its useful life. Accumulated depreciation is the total depreciation charged on an asset until a specified date. ItsRead more

    Accumulated Depreciation

    Depreciation is a wear and tear of an asset due to efflux of time and various other factors. It’s basically an allocation of the cost of a tangible asset over its useful life.

    Accumulated depreciation is the total depreciation charged on an asset until a specified date. Its a contra asset account. And since its a contra asset account it reduces the balance of an asset i.e reduces debit balance and therefore has a credit balance.

    Accumulated Depreciation is an Asset or a Liability?

    Well if you ask me I would say that its neither an asset nor a liability.

    Reasons to justify the above statement:

    Why is it not an asset?

    Assets are the resources held by an entity so that it could provide some economic value for the entity. But, in the case of accumulated depreciation, it does not generate any economic benefit for an entity rather it indicated that a certain sum of economic benefit has already been availed.

    Why is it not a liability?

    A liability is an obligation of an entity for making payment at a specified future date to a third party. Here, accumulated depreciation does not represent an obligation of an entity rather it is maintained just for the purpose of record-keeping.

    Conclusion

    According to the reasons mentioned above it can neither be called as an asset nor a liability. This would be the correct answer to this question.

    But still, if you have to compulsorily classify the same as an asset or a liability I would definitely not classify as a liability as it would not ensure fair representation of the financial statements since then it would be considered an obligation made to a third party which is not the case here.

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  1. This answer was edited.

    The answer to the question asked is “Liability is credited”. Now, let me help you determine the reason behind why and how is liability credited & not debited. Why and How is Liability credited? Amount payable by a business entity to others is referred to as liability. Liabilities such as creditoRead more

    The answer to the question asked is “Liability is credited”.

    Now, let me help you determine the reason behind why and how is liability credited & not debited.

    Why and How is Liability credited?

    Amount payable by a business entity to others is referred to as liability. Liabilities such as creditors, outstanding expenses, income received in advance, loan taken, etc are classified as personal accounts. So, it is important for us to know both the golden rules for personal accounts and modern rules for the treatment of liability.

    1. Golden rules

    First, we will interpret why liability is credited correlating it with the golden rules with the help of an example.

    Golden rules of accounting states-

    Debit the receiver, Credit the giver

    Example

    Lenovo Inc. acquired computer spares from its supplier XYZ Inc. for 5,00,000. The amount is still payable by Lenovo Inc. (ie.liability). As XYZ Inc. is the supplier of computer spares (ie. the giver of products & services), it is to be credited as per the golden rules.

    Journalizing this transaction in the books of Lenovo Inc. will be-

    Purchase A/cDebit5,00,000Expense A/cDebit all expenses and losses
     To XYZ Inc. A/cCredit 5,00,000Personal A/cCredit the giver

    The above journal entry shows that XYZ has been credited because he is the supplier and also a liability for Lenovo Inc.

    2. Modern rules

    Now, we will determine the reason why liability is credited correlating it with the modern rules along with an example.

    Modern rules of accounting states-

    Credit the increase in liability

    Example

    During the accounting period Jan-Dec 20×2, Mr. Alex has already paid rent 10000 each month for 10 months. But he could not pay the rent for 2 months until the end of the period. So, rent 20000 is still payable (ie. liability) by Mr. Alex.

    The journal entry for outstanding rent will be as follows-

    Rent A/cDebit20,000Debit the increase in expense
     To Outstanding Rent A/cCredit 20,000Credit the increase in liability

    The above entry shows an increase in liability of Mr. Alex as the amount of rent 20000 is payable by him.

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  1. This answer was edited.

    The simple meaning of capital, as known by many, is the sum of money invested in the business by the owner/shareholder/partners. It can be in the form of cash or assets. From the accounting perspective, capital is generally of three types, equity capital, debt capital, and working capital. Capital aRead more

    The simple meaning of capital, as known by many, is the sum of money invested in the business by the owner/shareholder/partners. It can be in the form of cash or assets. From the accounting perspective, capital is generally of three types, equity capital, debt capital, and working capital.

    Capital as a Liability

    A very common question that strikes us is that even though capital is invested by the owner in the form of cash or assets, why is it recorded on the liabilities side of the balance sheet? From the accounting perspective, Capital is a liability because the business is obliged to repay its owner.

    To make the point clear, I would like to introduce you to the two different accounting perspectives of the same.

    Internal Liability

    Firstly, in the case of equity capital, it refers to ownership and represents the owner’s fund. The company is obliged to repay the owners as it is an internal liability and interest on capital is also paid during the operations of a company. A company is considered as a separate legal entity from its owner. The proprietor/shareholder/partners have invested the amount with an aim and expectation of profits in return.

    However, the owners are repaid only if any amount is left after paying off all the obligations during the winding up of the company. It is not a mandatory liability like in the case of debt capital. It can also be represented as follows:

    Assets = Liabilities + Capital

    I have used the accounting equation to show the shareholder’s equity/capital as a difference and balancing figure between the company’s liabilities and assets. Since the capital invested is used to pay off all the debts, it has a credit balance and is recorded on the liabilities side of the balance sheet.

    External Liability

    Secondly, let us assume that company A has borrowed a certain sum of money from the company B, and holds onto the amount invested for realizing feasible profits in the future. The company is obliged to repay, irrespective of profits or loss.

    In simple words, I can conclude that capital is a liability.

    Capital as shown in the balance sheet

    Balance Sheet as at 31st March,yyyy

    LiabilitiesAmount AssetsAmount
    Capital2,40,000Cash in hand70,000
    (+) Net Profit70,000Accounts receivables50,000
    (-) Drawings(30,000)Patents10,000
    (-)Interest on capital(20,000)Equipment45,000
    Retained Earnings10,000Building90,000
    Sundry Creditors40,000Prepaid Expense35,000
    Outstanding Rent/Salary5,000Goodwill20,000
    General Reserve10,000Investments60,000
    Loan taken from Bank55,000Accrued Income10,000
    3,80,0003,80,000

    Hope this helps.

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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 StatementTreatment
    Profit and Loss accountReduced from the respective income on the credit side of profit and loss account
    Balance SheetPresented 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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