What journal entries are made when a customer pays in advance?
The money has arrived, but the product has not been delivered yet. Is it income or a liability? Using a sewing workshop as an example, we look at how account 6310 works.
The "Ipakchi" sewing workshop signed a contract with a school: 200 pupil uniforms are to be sewn by September. As a sign of good faith, the school transferred 30 million soum in advance. The workshop manager, Otabek, was delighted: "We have income!" The accountant shook her head: "Not yet. For now, this is our debt."
Who is right? The accountant.
Why is money received in advance not income?
The school has paid, but has received nothing in return yet. If the workshop does not sew the uniforms, it will have to give the money back. So this money is the workshop's liability: it will be "settled" either with the product or with cash.
NAS No. 21 says the same: an advance received is a liability of the organisation that received the money until the product is delivered. That is why it is recorded in a liability account, 6310 "Advances received from buyers and customers – current portion".
The amounts in the example are hypothetical. The workshop is not a VAT payer, so there are no VAT entries.
What journal entries are made, step by step?
- The school transferred 30 000 000 soum in advance
- In August the uniforms were delivered; the contract value is 50 000 000 soum
- The cost of the uniforms (fabric, thread, wages) is 36 000 000 soum
- The school paid the remaining 20 000 000 soum after delivery
| Step | Transaction | Debit | Credit | Amount |
|---|---|---|---|---|
| 1 | The advance arrived in the bank | 5110 | 6310 | 30 000 000 |
| 2 | Uniforms delivered, revenue recognised | 4010 | 9010 | 50 000 000 |
| 3 | Cost of products sold written off | 9110 | 2810 | 36 000 000 |
| 4 | The advance received earlier is offset | 6310 | 4010 | 30 000 000 |
| 5 | The school paid the remaining amount | 5110 | 4010 | 20 000 000 |
Now let's check. In 6310: 30 million on the credit side, 30 million on the debit side, balance zero. In 4010: 50 million on the debit side, 30 + 20 = 50 million on the credit side, balance also zero. All settlements are closed.
Why is the fourth step needed?
This is where many people go wrong. When the uniforms are delivered, the school owes 50 million (4010). But 30 million of it has already been paid. To "net" these two amounts against each other, 6310 is debited and 4010 is credited. Without this entry, the balance sheet would show two wrong figures at the same time: "the school owes us" and "we owe the school".
What if the contract is cancelled or the money sits for a long time?
| Situation | Debit | Credit |
|---|---|---|
| The contract was cancelled and the advance returned | 6310 | 5110 |
| The advance was received for a term of more than one year (long-term portion) | 5110 | 7310 |
| Transfer of a long-term advance to the current portion | 7310 | 6310 |
| An unclaimed advance written off after the limitation period expired | 6310 | 9390 |
Test yourself
5 questions on this topic: pick an option or reveal the answer.
An advance payment for goods from a customer has arrived in the bank. What journal entry is made?
Three months ago the company lent money to another organisation as a short-term investment (5830). The loan has now been repaid to the settlement account. Which journal entry is made?
Gulzor dekor had received an advance payment (6310) from a customer. The customer did not take the goods, did not ask for the money back, and the advance was not used during the limitation period. How is the advance amount written off?
Because a defect was found in fabric it had sold, Ipak yo'li tekstil gave the customer a price discount, and the customer's debt was reduced by that amount. What journal entry is made?
In which account is the current portion of an advance received from a customer recorded?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- NAS No. 21 "Chart of Accounts", paragraphs 270–272 · account 6310: an advance received is a liability until the goods are delivered; correspondences 6310–6390 / 4010, 6310–6390 / 9390
- NAS No. 21, paragraph 329 · account 7310: long-term advances and their transfer to the current portion
- Example and amounts · prepared by the author, hypothetical