Question

Explain the following statements with respect to a specific concept or convention along with its reasoning:...

Explain the following statements with respect to a specific concept or convention along with its reasoning:

a. Near the end of the current year, a company required a customer to pay Rs.200,000 as a deposit for work that is to begin in the following year. At the end of the current year the company reported the Rs.200,000 as a liability on its balance sheet. Which accounting principle/guideline prevented the company from reporting the Rs.200,000 on its income statement for the current year?

Business   Accounting   
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Answer #1

As per the concept of Revenue and Capital expenditure / receipt classification, An amount received from customer as a Deposit ( which means it would be repaid in future years ), would be classified as a Capital receipt instead of a revenue receipt. and would be shown as a Liability in the balance sheet instaead of income in Profit and Loss statement.

As per "Revenue Recognition" It would be reported as a liability in Balance seet and would be recognized as revenue in the future years when related expenditure would have been incurred.

Hope it helps. In case of any issue or doubts , please do comment below

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