Contract Assets and Contract Liabilities
Contact Asset is the company’s right to obtain consideration due to the goods or services which already delivered to customers. The contract asset is usually attached to other conditions other than the time which allows the holder to claim the asset. The company needs to fulfill other criterias before claiming payment from customers.
Contract asset is very similar to accounts receivable which is the right to receive payment from customers after goods and services are delivered. However, accounts receivable is not attached to other conditions besides time. The customers must complete the payment when the time arrives (due date). Due to this nature, contract assets and accounts receivable must be recorded and presented separately in financial statements.
Company recognize accounts receivable after issuing invoice to the customers. Contract asset is recorded when company complete the work for customer but not yet issue invoice. They need to record revenue and contract asset.
Contract Asset Example
One customer purchases a package from Company A amount $ 5,000, which include equipment and installation fee. In the contract, the customer only pays when the package is delivered which means the equipment installs and tests properly. Due to the nature of the package, Company A could not provide them at the same time.
On 25 December, Company delivers the equipment but the installation will be conducted in the following month.
On 05 January next month, the technician has gone to install and complete the work. At the same time, the have sent the invoice to the customer and finish the job.
Please prefer the journal entries for each transaction. Base on experience, the equipment’s revenue is $ 4,000 and the installation fee is $ 1,000.
Contract Assets Journal Entry
On 25 December, we need to record revenue from the equipment as the risk and reward already transfer. Company needs to make journal entry by debiting contract asset $ 4,000 and credit revenue $ 4,000.
| Account | Debit | Credit |
|---|---|---|
| Contract Asset | 4,000 | |
| Revenue | 4,000 |
On 05 January, we need to record accounts receivable as the work is completed and customers accept the job. Company make journal by debiting accounts receivable $ 5,000 and credit contract asset $ 4,000 with additional revenue $ 1,000.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 5,000 | |
| Contract Asset | 4,000 | |
| Revenue | 1,000 |
Contract Liability
Contract liability is the supplier obligation which requires to transfer of goods or service to the customer as the customer already make a prepayment. However, the company will require to record the contract liability even customer not yet pay if it is a non-cancellable contract. Contract liability is also known as unearned or deferred revenue.
Contract Liability Example
Company A signs a non-cancelable contract with customers to deliver 1,000 units of product amount $ 5,000. On 05 January, customers make full payment of $ 5,000 to company A. And on 10 January, all goods are delivered to the customer.
Please record the journal entry in each stage.
Contract Liabilities Journal Entry
On 05 January, the customer makes a payment, so the company need to make journal entry by debiting cash $ 5,000 and credit contract liabilities $ 5,000 as the goods not yet deliver to customer.
| Account | Debit | Credit |
|---|---|---|
| Cash | 5,000 | |
| Contract Liabilities | 5,000 |
On 10 January, the work is completed, we need to recognize the revenue by debit contract liabilities and credit revenue.
| Account | Debit | Credit |
|---|---|---|
| Contract Liabilities | 5,000 | |
| Revenue | 5,000 |