Question

Advance recieved from a customer is not taken as income or Sales
Accounting Concept followed
Why is it Revenue Recognition and not Prudence concept

Answer 1

Dear Student,

Revenue Recognition concept states that under accrual system of accounting , revenue should be recorded only when it has been earned i.e. when goods have been sold or services have been provided, only in that case revenue should be recorded.

And concept of prudence states that revenue or assets must be recorded when they are certain and liabilities and expenses must be recorded when they become probable.

So, when we receive Advance from customers , it is basically the amount provided by customers early but the actual revenue has not been earned yet. This is based on revenue recognition principle and do cover prudence concept and so the same is not recorded as sales or Income.

Regards