A customer pays Rs. 48,000 in advance for services that the business will provide next month. How should the receipt be treated at the date of collection?
Correct answer: D. Recognise a contract liability of Rs. 48,000
- A. Recognise revenue of Rs. 48,000
- B. Reduce trade receivables by Rs. 48,000
- C. Recognise an accrued expense of Rs. 48,000
- D. Recognise a contract liability of Rs. 48,000
Explanation
The business has received cash but has not yet earned the revenue. Therefore, the amount is recorded as a contract liability until the service is provided. It is not a receivable because the customer has already paid.
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Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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