Question

Why is income received in advance a liability? Provide an example.

Answer 1

--Income received in advance is accounted for as a liability because the amount received cannot be treated as a REVENUE, unless the services ( for which that amount in advance was received) is provided or the goods have been sold.

--Revenues are to be recorded only when the services have been provided or goods have been sold, whether cash has been received or not.

--Example of advance received and treated as a liability:
An accountant received $ 200 for providing service to his client for next 4 months. He received this amount as an advance and will record the following entry:

[Debit]	Cash	$200
[Credit]	Unearned service revenue (a liability)	$200

As the services get provided, the Unearned Revenue gets debited and revenues are recorded as 'earned'.