Question

Mike accepts an advance fee, $ 1,000, for artwork to be done for another agency

Is this amount will be reflected into liabilities? I thought it as $1000 into assets debit and liabilities credit part $1000. How it will change after service will be done?

Answer 1

Yes , this amount of $ 1000 will be shown as liability in financial statements of Mike. Because Mike has received the fees in advance and has yet not earned the income so received. So owing to the accrual basis of accounting, this income will be shown as liability as of now. Though increasing the liabilities by $1000 , Assets will also be increased in cash increase by $1000.

when the service has been done now the Mike has earned that income and can now show that income as revenue in books of accounts. Thus following entrie will be passed

Profit & Loss A/C Dr. 1000

To Advance Income A/C 1000

Thus finishing off the advance income asset of $1000 and crediting the P/L A/C by $ 1000.

I hope this clears your doubt. Please reach out to me through comment in case of further query.

Kindly give a big fat thums up if you find the given answer useful.

Thanks & Regards

Aditya Aggarwal