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Dear Chris
As we receive grants for buying assets we make this entry : Bank Dt Unearned Revenue Cr
Unearned revenue is liability which suggests that we received money but haven’t done any work yet. What kind of work is meant here ? We haven’t bought this car yet therefore we haven’t started delivering goods to customers and therefore no revenue was earned yet. Is this the reason why we can’t account for regular income when we receive money from grant ?Hi,
If we are buying an asset with the cash received from the grant then we would either DR Bank CR Deferred income, or DR Bank CR PPE. The most common method is the first one, recognising deferred income, as we are recognising the fact that we have received income but have not yet used the income received within the business.
The deferred income is then released through profit or loss when we depreciate the purchased asset, so as to match the income received to the use of the asset itself.
The money isn’t shown as regular income (presumably you mean revenue) as this money does not come from revenue generating activities, with it being money received from a grant.
Thanks
thanks for reply. Why do we have to match received income to the use of asset ?
when you match received income to depreciation it balances the loss that depreciation would cause if accounted on its own. Now when you match income with depreciation you don’t have loss in your profit and loss. Is that the reason why we must match received income with depreciation ?
Yes, that is correct. If the asset is generating income then this income comes because we are incurring a cost. That cost is from the use of the asset and hence the matching of the depreciation charge.
Thanks
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