19.4 - The liability approach to prepaid revenue

1. 19.4 THE LIABILITY APPROACH
TO PREPAID REVENUE

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. © 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. © 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. © 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. © 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. © 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. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ3 X