Contract Liability Journal Entry
Contract liability arises when a company receives payment from a customer before delivering the goods or services. This advance payment represents a liability because the company owes the goods or services to the customer.
Scenario: Advance Payment for Services
Assume a company receives ₹50,000 in advance for a service to be provided next month.
Initial Journal Entry for Receiving Advance Payment:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash/Bank A/c | 50,000 | |
| To Contract Liability A/c | 50,000 | |
| (Being advance payment received from customer) |
Explanation:
- Cash/Bank A/c is debited to record the cash received.
- Contract Liability A/c is credited to record the liability for the service to be provided.
Journal Entry When Service is Provided
When the service is provided, the company recognizes the revenue and reduces the contract liability.
Scenario: Service Provided for Advance Payment
Assume the company provides the service and recognizes the revenue of ₹50,000.
Journal Entry for Providing Service:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Contract Liability A/c | 50,000 | |
| To Service Revenue A/c | 50,000 | |
| (Being revenue recognized for service provided) |
Explanation:
- Contract Liability A/c is debited to reduce the liability.
- Service Revenue A/c is credited to recognize the revenue.
Summary of Entries
Receiving Advance Payment:
- Debit Cash/Bank A/c
- Credit Contract Liability A/c
Providing Service:
- Debit Contract Liability A/c
- Credit Service Revenue A/c
Detailed Example
Scenario: Multiple Advance Payments and Services Provided
Assume a company receives the following advance payments:
- ₹30,000 on 1st June for Service A to be provided on 15th June
- ₹20,000 on 5th June for Service B to be provided on 20th June
Journal Entry for Receiving Advance Payments:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash/Bank A/c | 30,000 | |
| To Contract Liability A/c | 30,000 | |
| (Being advance payment received for Service A) |
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash/Bank A/c | 20,000 | |
| To Contract Liability A/c | 20,000 | |
| (Being advance payment received for Service B) |
Journal Entry for Providing Services:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Contract Liability A/c | 30,000 | |
| To Service Revenue A/c | 30,000 | |
| (Being revenue recognized for Service A provided) |
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Contract Liability A/c | 20,000 | |
| To Service Revenue A/c | 20,000 | |
| (Being revenue recognized for Service B provided) |
Summary of All Entries
Receiving Advance Payments:
- Debit Cash/Bank A/c
- Credit Contract Liability A/c
Providing Services:
- Debit Contract Liability A/c
- Credit Service Revenue A/c
