Accounting

We answer your accounting questions.

Over 500 questions have been answered on our accounting blog. Click here to suggest a question.



June 17, 2009

Where is a contract with a customer reported on the balance sheet?

A contract to perform future services for a customer is not reported on the balance sheet of the company that will be providing the services.  For example, if Company Jay and one of its customers sign a contract in December agreeing that Company Jay will deliver $20,000 of services beginning in January, the contract is not reported on Company Jay’s December 31 balance sheet. (If the customer makes a deposit of $3,000 at the time of signing the contract, the $3,000 will be recorded by Company Jay in December with a $3,000 debit to Cash and a $3,000 credit to the liability account Customer Deposits or Unearned Revenues. With no downpayment or advance payment in December, there is no entry recorded.)

The $20,000 contract is not reported as an asset on Company Jay’s December 31 balance sheet. The reason is that Company Jay has not earned any of the contract amount and therefore does not have a right or a receivable to the $20,000 as of December 31. Similarly, Company Jay’s income statement for December and its December 31 owner’s equity cannot include any earnings associated with the contract.

Learn more about Accounting Principles.

Related Questions



Comments

7 Responses to “Where is a contract with a customer reported on the balance sheet?”

  1. jamal on June 18th, 2009 8:26 am

    why employees are not shown in the balance sheet?

  2. Ayman on June 27th, 2009 6:50 am

    I think future service contracts can be reported in the balance sheet as “unearned revenuiesWhy not report future service contracts in the balance sheet of the company? Doesn’t it represent an obligation on both sides of the contract to be met? It is also an asset to both of them?
    I think when company X signs a contract to deliver services in the future to company Y both companies practically establish both an obligation and an asset.
    An obligation to deliver the service for X and an obligation to pay the contract amount for Y which means the contract value is debated to “unearned revenues” for X and “Accounts payables” for Y.
    For credit side, X would report “Accounts Receivables” and Y would report “Something in Transit”
    So both sides of the balance sheet are effected with the contract signing for both companies and the Accounting Equation is met…. Read More
    Of course if there is a down-payment, that will only effect the Payables in Y’s books and the Receivables in X’s books.
    I disagree that the contract is not an event to be recorded, when a company signs a contract to deliver a service, it would start preparing itself to fulfill the contract during the present period which means that it might increase its inventory which in turn will affect the analysis ratios for the present accounting period, otherwise the balance sheet will be misstated, what do u think?

  3. JOHN on June 28th, 2009 12:30 pm

    I think Ayman’s may be suitable for the medium to large scale size org. if you are correct.
    There is no significant differences if the contract is not reported in the balance sheet, just personal idea. In other word, it is not a material event but just two different accounting policies.

  4. Doreen on July 2nd, 2009 9:05 am

    I think,Ayma’s is a brilliant one however,there is the prudence concept of accounting which states that a transction should be recorded once its finalised more so a revenue.a recorded contract may make hike the balance sheet figure thus distortion.these priciples have to guide us when preparing finacial statement.

  5. Doreen on July 2nd, 2009 9:15 am

    I too think in the same line as Jamal,employees are substancial assets of the organisation.but the problem is, it is extremly difficult to express employees in monetary terms as is required by the principle of accounting that all transactions should be reported in monetary form.For instance,would you say our IT specialist is worth 2,000 usd.unlike shares and goodwill,people are priceless.

  6. Olive on July 9th, 2009 1:22 pm

    Please which segment of this site can i find a full version of the topic ‘ACCOUNTING FOR CONSTRUCTION CONTRACT’ thanks.

  7. christophe on October 1st, 2009 1:27 pm

    Would mind please to explain the deffered tax in details and examples explained.

    Thanks much,

    Christophe

Leave a Reply