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Nabia Saher

Is advance received from customer treated as revenue?

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1 Answer

  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, 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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