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Hey there,
I had a doubt regarding the revenue recognition.
We do know that the revenue must be recognized as and when the performance obligation gets satisfied. But what if we are getting paid in advance, at least a proportion of total, maybe as a deposit?
how do we treat that in our accounts?
I just had this in my mind since many days.
Also, can we expect something like these in our MCS exams?Forever grateful for your work!
LahariIt’s treated as a liability – money the organisation effectively “owes” the customer or client as goods or services not yet provided. Journal entries debit bank/cash, credit deferred income.
On recognition of revenue this reverses liability to extent that it is recognised- debit deferred income, credit revenue. Hope this helps.Dear Sir,
Thank you for such a nice explanation to the topic. I however have some clarity to seek on example 1 related to mobile handset and subscription revenue recognition. The period of obligation is 12 months. Suppose the customer takes the scheme on 1st of November. So effectively he has subscription of 2 months for current year and 10 months for next year. $50 per month effectively amounts to Rs 100 collected in year 1.
My question is and please correct my understanding (if it is incorrect) that since handset is already provided to customer, we records sale of handset of $ 214 on 1st November and make a receivables entry of simillar amount. As and when customer pays the $50 monthly, we apportion the amounts in ratio arrived of 35.7% towards handset receivable and 66% towards monthly service cost as income.
Is the above understanding correct??
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