Accounting for income received in advance

Accounting for income received in advance

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Company A enters a contract to render services to company B over two years. B has asked A to raise an invoice for the agreed costs which B wil pay in full in advance. How will A record the invoice in the Ledger, as the service has not been provided. Any suggestions?

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By User deleted
24th Feb 2010 14:32

Deferred income

The entries are as follows:

Dr Customer ledger Account, Cr Deferred Income, Cr output vat (if applicable) ---This records the invoice

Dr Bank, Cr Customer ledger Account -- This records the payment

 

End of year 1 - Dr Deferred Income, Cr Sales - Record Year 1 sales

End of year 2- Same as above - To record balance of the sales

 

Hope this helps

 

 

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By emily
24th Feb 2010 15:18

Deffered Income

Thanks this is very helpful and easy to follow. just to confirm should deffered income be a balance sheet account (creditor)?

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By User deleted
24th Feb 2010 15:56

Yes it's a balance sheet item. Effectively it means income received in advance of goods/services being provided, therefore there is an obligation to provide these, which means it is a liability (creditors<1 year)

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Euan's picture
By Euan MacLennan
24th Feb 2010 20:46

Less than 1 year?

At the outset, the deferred income for the second year of the lease is a creditor due after more than 1 year.

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By User deleted
24th Feb 2010 21:06

That's correct, Euan, It is >1 year at the outset. So in Yr1 accounts would you split it between less than 1 year and more than 1 year? Or would you just show the whole lot as > 1 year

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