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

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In order to properly account for all the funds and transactions made during a prepaid transaction, you have to account for credits and debits after both the first payment and the subsequent delivery of the goods.

First and foremost, you would write down the debit (or funds received) towards the cash account for a total of $25,000. Next, there is a credit in the column for inventory deliverables for the same amount. This accounts for the payment made and the fact that you have yet to deliver the product.

After the delivery, you register a debit of $25,000 towards Inventory deliverables to zero out that account. Then, you would register a credit of $25,000 for cost of goods sold to account for everything sold and earned.

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The main thing to remember in this ledger is what accounts you will be using and how and when they must be updated. When a client pays in advance, you will receive money as a credit, but you won’t be able to convert that into sales revenue, or cost of goods sold, until after the product is delivered.

You can put the following in your statement:

Debit - Cash account: $25,000
Credit - Inventory Deliverable account: $25,000

This balances the accounts after receiving the cash but prior to delivering the goods. After delivery, you would make the following adjustments.

Debit - Inventory Deliverable account: $25,000
Credit - Cost of Goods Sold: $25,000

At the end, the accounts will balance out and you will have accounted for every transaction made.

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It is true that you should not recognize revenue until it has been earned or in your case after the goods have been delivered to the customer. You can call the inventory account, "Inventory Deliverable" as long as you debit it after the goods have been delivered. There are three accounts that will be adjusted: Cash, Accounts Deliverable, Cost of Goods Sold.

Here is how you make the entries. After you receive the cash, you should make the following entries:

DEBIT - CASH ACCOUNT ($25,000)

CREDIT - INVENTORY DELIVERABLE ACCOUNT ($25,000)

After you deliver the goods to the customer, you should make the following entries:

DEBIT - INVENTORY DELIVERABLE ACCOUNT ($25,000)

CREDIT - COST OF GOODS SOLD ACCOUNT ($25,000)

Alternatively, you can rename the Inventory Deliverable Account to Prepaid Inventory.

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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

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