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19.4 THE LIABILITY APPROACH
TO PREPAID REVENUE
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Fancy Furniture is a small busi...
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 On 31 May 2015 a customer order...
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 At this point, is the $300 rece...
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 The $300 received is a Liabilit...
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 So the $300 (plus GST) received...
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
19.4 THE LIABILITY APPROACH TO
PR...
© Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
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19.4 - The liability approach to prepaid revenue

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19.4 - The liability approach to prepaid revenue

19.4 - The liability approach to prepaid revenue

  1. 1. 19.4 THE LIABILITY APPROACH TO PREPAID REVENUE
  2. 2. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  Fancy Furniture is a small business producing handmade furniture for clients  Orders are taken upfront from customers who pay in full  The business then makes the furniture  The furniture is then delivered to the customer 19.4 THE LIABILITY APPROACH TO PREPAID REVENUE Fancy Furniture Customer Fancy Furniture makes the furniture
  3. 3. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  On 31 May 2015 a customer ordered 3 tables:  Selling price = $100 each (plus GST)  Cost = $40 each (plus GST) Fancy Furniture Customer $300 + $30 GST 19.4 THE LIABILITY APPROACH TO PREPAID REVENUE
  4. 4. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  At this point, is the $300 received a… 19.4 THE LIABILITY APPROACH TO PREPAID REVENUE Revenue Cash [A] 31/5 Sales/GST cl. 330 GST Clearing [L] 31/5 Cash 30 Sales [R] 31/5 Cash 300 Liability Cash [A] 31/5 Sales/GST cl. 330 GST Clearing [L] 31/5 Cash 30 Prepaid Revenue [L] 31/5 Cash 300
  5. 5. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  The $300 received is a Liability because:  It has been received but not yet earned  Therefore, it meets the definition of a Liability This is a Liability because: • There is a present obligation (to provide 3 tables) • Arising from a past event (the $300 prepayment) • There will be an outflow of future economic benefits (the materials, labour etc. to make the tables) Prepaid Revenue 19.4 THE LIABILITY APPROACH TO PREPAID REVENUE
  6. 6. © Michael Allison, Trinity Grammar School. Author’s permission required for external use  So the $300 (plus GST) received is treated as a Liability when received:  This is called the Liability Approach to recording prepayments The Liability Approach Why did the $300 received go in the Sundries column instead of the Sales column? Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30 19.4 THE LIABILITY APPROACH TO PREPAID REVENUE Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30 Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30 Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30 Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30 Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30 Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30
  7. 7. © Michael Allison, Trinity Grammar School. Author’s permission required for external use 19.4 THE LIABILITY APPROACH TO PREPAID REVENUE Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30 Cash [A] 31/5 Sales/GST clearing 330 GST Clearing [L] 31/5 Cash 30 Prepaid Revenue [L] 31/5 Cash 300 Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30 Cash [A] 31/5 Sales/GST clearing 330 Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30 GST Clearing [L] 31/5 Cash 30 Cash Receipts Journal Date Details Receipt No. Bank Debtors Control Cost of Sales Sales Sundries GST 31 May Prepaid revenue 0912 330 300 30 Prepaid Revenue [L] 31/5 Cash 300
  8. 8. © Michael Allison, Trinity Grammar School. Author’s permission required for external use TASK In-class Homework SQ3 X
  • DevonLawes

    May. 26, 2020

19.4 - The liability approach to prepaid revenue

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