Journal Entry questions (credit/debit)

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I have a transaction entry that states "Customers paid $25,000 in advance payments for goods that will be delivered later"

My questions is which account will the transaction credit? I know my cash account will be debited since the transfer of cash increases my cash account. Will i need to create a new account called "Inventory Deliverable" as a liability and just credit that? Since the inventory isn't out of the company's hands yet, i don't think it should be credited as revenue under accrued basis of account.
 

The Finance Writer

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I'm going to let counterofbeans or kirby answer because they like helping accounting students with their homework more than I do. They're probably going to ask if the advances represent only partial payment and, if so, are they refundable if the sale is cancelled by the purchaser.

I will hint that you're on the right track about making a credit to a liability account rather than an income account.
 
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It doesn't say if it's a partial payment or full payment. But i'm assuming it's full if it doesn't state otherwise.
 

Counterofbeans

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In reality, you can call it whatever you want, inventory deliverable, deferred revenue, green eggs and ham, etc., but, ultimately, the key is that you will want to record this into a liability account because you haven't met the threshold for recognizing revenue yet. Here, it doesn't really matter if this is a full or partial payment.

The "best" name is something along the lines of deferred revenue.
 
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There's also a transaction 13 that states
"A physical count at year end revealed $20,000 of unsold inventory still on hand"

i'm not really sure what to do with this info. Does not tell me if sales in cash or on account. And it does not state that it's a cost price.

Heres a list of all the transactions

1. An insurance policy was purchased on February 28 for $1,800.
2. During the year, inventory costing $140,000 was purchased, all on account.
3. Sales to customers totalled $200,000. Of these, $40,000 were cash sales.
4. Payments to suppliers (for inventory that had been purchased earlier) totalled $110,000.
5. Collections from customers on account during the year totalled $140,000.
6. Customers paid $25,000 in advance payments for goods that will be delivered later.
7. Equipment worth $140,000 was purchased on October 1 for $40,000 cash and a two-year, 10% note with a principal amount of $100,000.
8. Salaries totalling $44,000 were paid to employees during the year.
9. The board declared dividends of $12,000 in December 2011, to be paid in January 2012.
10. A year-end review revealed that the insurance policy (in item 1) was for one year of coverage that began on March 1, 2011.
11. The equipment that was purchased on October 1, 2011, is to be amortized using the straight-line method, with an estimated useful life of 10 years and an estimated residual value of $20,000.
12. No interest was paid on the note during the year.
13. A physical count at year end revealed $20,000 of unsold inventory still on hand.
14. It was determined that 80% of the goods that were paid for in advance (in item 6) had been delivered to the customers by the end of the year
15. In addition to the salaries that were paid during the year, salaries of $4,000 remained
unpaid at the end of the year.
 

Triest123

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There's also a transaction 13 that states
"A physical count at year end revealed $20,000 of unsold inventory still on hand"

=> It indicates that the closing inventory is $20,000 with which you can compute
the costs of goods sold.
 
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There's also a transaction 13 that states
"A physical count at year end revealed $20,000 of unsold inventory still on hand"

=> It indicates that the closing inventory is $20,000 with which you can compute
the costs of goods sold.
Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory
 
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For unsold inventory, assuming that on the books, the $20,000 in inventory isn't recorded yet, you should credit material purchases (Cost of Sale) and debit inventory. It could get a bit more complex if the inventory is the result of material, labour, and overhead.

For the $25,000 advance payment. It could be a liability account. You should simply name it 'Customer advance' and it would be a unearned/deferred revenue account
 

Counterofbeans

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For unsold inventory, assuming that on the books, the $20,000 in inventory isn't recorded yet, you should credit material purchases (Cost of Sale) and debit inventory. It could get a bit more complex if the inventory is the result of material, labour, and overhead.

For the $25,000 advance payment. It could be a liability account. You should simply name it 'Customer advance' and it would be a unearned/deferred revenue account
I wouldn't call it, "Customer Advance"---that suggests an asset account.
 

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