I have a transaction entry that states "Customers paid $25,000 in advance payments for goods that will be delivered later"My questions is which account will the transaction credit? I know my cash...

I have a transaction entry that states "Customers paid $25,000 in advance payments for goods that will be delivered later"

My questions is which account will the transaction credit? I know my cash account will be debited since the transfer of cash increases my cash account. Will i need to create a new account called "Inventory Deliverable" as a liability and just credit that? Since the inventory isn't out of the company's hands yet, i don't think it should be credited as revenue under accrued basis of account.

Asked on by iamelf

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michael-niagara's profile pic

Michael Ugulini | (Level 3) Educator

Posted on

Your journal entry would be:

DEBIT (DR) - CASH     25,000

      CREDIT  (CR) - UNEARNED REVENUE  25,000

*To record the receipt of cash for inventory sold but not yet delivered.

You cannot recognize this as sales revenue just yet until you complete your end of the transaction by delivering the goods so they are in the customer's possession. Once you deliver the merchandise and the customer has received it then the transaction is complete and you can recognize the sales revenue and record the transaction in your journal this way:

DEBIT (DR) - UNEARNED REVENUE    25,000

                CREDIT  (CR) -  SALES REVENUE  25,000

malkaam's profile pic

malkaam | Student, Undergraduate | (Level 1) Valedictorian

Posted on

"Customers paid $25,000 in advance payments for goods that will be delivered later"

The entry for this is:

Entry                                                    DR                CR

Cash                                                  25000

        Unearned Revenue                                            25000

(To record the cash received but inventory not yet delivered)

Unearned revenue is the  cash received but inventory not yet delivered (in the above case), unearned revenue is also used in the cases of cash received but services not yet rendered, for services to be rendered in future the same entry will be made.

And once the services have been rendered this entry will be recorded to close the unearned revenue account which will transfer the amount in unearned revenue to sales revenue.

Entry                                                    DR                CR

Unearned Revenue                                25000

         Sales Revenue                                                  25000

(To record the inventory delivered and revenue received)  

           

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