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Discy Latest Questions

  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 MayCash a/cDebit40,000Debit the increase in asset
      To Mr. K’s advance a/cCredit40,000Credit the increase in liability

    (being advance received from the customer)

    • 5 JuneAccounts Receivable a/cDebit40,000Debit the increase in asset
      To Revenue a/cCredit40,000Credit the increase in revenue

    (being customer invoiced

    • 5 JuneMr. K’s advance a/cDebit40,000Debit the decrease in liability
      To Accounts Receivable a/cCredit40,000Credit 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.

    Accounts receivable as an asset I think before getting onto this question you should have a clear idea about what does an account receivable mean. An account receivable refers to an amount due to be received by the company for the sale of goods or services rendered. It's the value of goods that theRead more

    Accounts receivable as an asset

    I think before getting onto this question you should have a clear idea about what does an account receivable mean.

    An account receivable refers to an amount due to be received by the company for the sale of goods or services rendered. It’s the value of goods that the customer has not yet paid even though he has received the title of goods or enjoyed services.

    In simple words, any sum of money owed by a person for purchase made on a credit basis refers to an account receivable.

    For Example,

    Uber Inc. purchases 2000 units of smartphones from Apple Inc. for gifting them to its employees it purchases it on a 45 days credit and the amount remains due on a reporting date hence such an amount due becomes an account receivable for Apple Inc.

    Moving ahead, the answer to your question is that ” account receivable is an asset”.

    Why is it an asset?

    As explained earlier accounts receivable is the money owed by the client to the company. Hence, it can be said that the company has a right to receive the money since it has already delivered a product or rendered service. Because of this, the customer must pay to the company within a specific time frame.

    And so it’s an Asset since it ensures the future economic benefit for the company.

    The accounting treatment of such a transaction at the time of making a credit sale:

    Accounts Receivable a/cDebitIncrease in Asset
    To Sales a/cCreditIncrease in Revenue

    And at the time of actual receipt of cash :

    Cash A/cDebitIncrease in Asset
    To Accounts Receivable A/cCreditDecrease in Asset

    It shall be presented in the balance sheet under the head of the current asset if the amount is receivable within a year and beyond that, it’s recorded under the head of non-current assets
    In case you are unable to understand the position of such item in a balance sheet the below example would be of great help

    Presentation of Account receivable in an extract of balancesheet

    Why is it not a revenue?

    Revenue is the income generated by an entity. A major part of such revenue comes from sales or if an entity renders services from such services. It covers only that part of it pertaining to the current reporting period.

    Whereas the balance in the accounts receivable includes the unpaid dues from the customers for the current reporting period and earlier reporting period.

    Thus it can be said that the accounts receivable balance > amount reported in an income statement.

    Because of the reasons stated above, it can safely be concluded that accounts receivable is an asset.

    If the bad debts exist the company will have to reduce such balance from the total of accounts receivable and will have to debit it in its profit and loss statement.

    I have tried to answer it as simply as I can and I hope it helps.


    Aastha Mehta

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