Question

Ink Spill, a printing company, provides printing services to its customers. Customers normally pay for printing services in advance. In October 2020, Ink Spill received $20,000 from customers for services to be provided in November 2020. A senior accountant at Ink Spill wants to record the full amount as a liability in the company’s Balance Sheet at the end of October 2020.

Required:

Should the $20,000 be recorded as a liability in the company’s Balance Sheet at the end of October 2020? Explain, using the definition and recognition criteria of a liability in your explanation.

Answer 1

Ans:

Yes, $ 20,000/- to be recorded as a liability in the Company's balance sheet at the end of October,2010 due to the following:-

1.

The revenue recognition principle using accrual accounting requires that revenues are recognized when realized and earned–not when cash is received. The revenue recognition principle requires that revenue is recognized when the delivery of promised goods or services matches the amount expected by the company in exchange for the goods or services. Considering the above it is not possible to account the above as a revenue in the above accounting period as the real revenue is recognized and cost incurred fully in November.

2.

As we know that a liability is something a person or company owes and it is an obligation between one party and another not yet completed or paid for. “In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future”.

A liability is recognized in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably.

Considering the above criteria, the received amount of $ 20,000/- is a 100% advance payment for the work to be executed, and no service is executed during the balance sheet period under consideration, this amount will be treated as a liability amount in the current balance sheet as advance received from Customers till the completion of work and relevant revenue is recognized.