Definition
The term advances from customers refers to money collected by a company prior to providing a product or service. Advances from customers are oftentimes collected when businesses sell prepaid subscriptions or gift certificates.
When companies collect this money, the intention is to eventually provide the product or service paid for by the customer. Following the receipt of this cash, the company would classify the advance as a current liability on the balance sheet.
Explanation
Current liabilities are defined as debts that must be paid within one year or one operating cycle, whichever is longer. When a customer pre-pays for a product or service, this transaction becomes part of a larger group of liabilities from advanced collections, which is a component of the company's definitely determinable liabilities, since it's both known to exist and can be measured precisely.
Advances from customers are commonplace in the airline, magazine or newspaper industries, whereby the customer usually pays for a seat on a plane, or a magazine subscription, prior to receiving the publications or flying on the airplane. Gift certificates, also known as gift cards, are another common arrangement that involves the collection of money in advance of providing a product or service.
When a company collects this money from a customer, there is an increase to cash and a corresponding increase to the current liability unearned revenue. When the product or service is rendered, the balance in unearned revenue decreases, and there is a corresponding increase to revenues.
Example
Company A's popular music store allows customers to purchase electronic gift certificates that are redeemable for songs or devices that can store and play songs. In the month of July, customers purchased $50,000 in gift cards from Company A. Customers also purchased $65,000 in songs from Company A in that same month.
The journal entry to record the collection of the advance payment would be as follows:
Debit | Credit | |
Cash | $50,000 | |
Unearned Revenue | $50,000 |
While the journal entry to record the redemption of the gift certificates would be as follows:
Debit | Credit | |
Unearned Revenue | $65,000 | |
Revenue | $65,000 |
Related Terms
The financial accounting term current liabilities are generally defined as any debts that must be paid within one year or one operating cycle, whichever is longer. Current liabilities are a subcategory of liabilities, which appear on a company's balance sheet.
Moneyzine EditorJanuary 12th, 2024
The financial accounting term determinable current liabilities refers to near-term debt obligations that can be precisely measured. To qualify as a determinable current liability, the debt obligation is reasonably expected to come due in a single operating cycle or one year. There must also be certainty about the existence of the obligation, as well as the amount owed.Moneyzine EditorJanuary 16th, 2024
The term liabilities from advance collections refers to money collected from others that is returnable or redeemable for goods or services. Liabilities from advance collections appear as a current liability on a company's balance sheet and include refundable deposits, advances received from customers, gift cards, and collections for third-parties.Moneyzine EditorJanuary 23rd, 2024
The term collections for third parties refers to money collected from customers on behalf of another entity. The most common examples include sales and payroll taxes. When a company collects this money, the intention is to eventually transfer it to the third party. Following the receipt of this cash, the company would classify the collections as a current liability on the balance sheet.Moneyzine EditorJanuary 11th, 2024- The term refundable deposits refers to cash collected from credit customers that a company expects to return after a specified period of time, or when certain conditions are satisfied. When companies collect this money, the intention is to return it after a relatively brief period of time. Following the receipt of the cash, the company would classify the refundable deposit as a current liability on the balance sheet.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term unearned revenue refers to revenues received in advance of rendering a service or providing goods to customers. Unearned revenues are recorded as a liability since it represents an obligation of the company derived from a transaction that occurred in the past.Moneyzine EditorSeptember 21st, 2023
The term current maturities of long-term debt refers to the portion of a company's liabilities that are coming due in the next 12 months. Examples of this long-term debt include bonds as well as mortgage obligations that are maturing. This portion of long-term debt is classified as a current liability on a company's balance sheet.Moneyzine EditorJanuary 12th, 2024
