Liabilities from Advance Collections
The term liabilities from advance collections refers to money collected from others that is returnable or redeemable for goods or services. Liabilities from advance collections appear as a current liability on a company's balance sheet and include refundable deposits, advances received from customers, gift cards, and collections for third-parties.
Current liabilities are defined as debts that must be paid within one year or one operating cycle, whichever is longer. Liabilities from advance collections is also part of the company's definitely determinable liabilities, since it's both known to exist and can be measured precisely.
Generally, liabilities from advance collections fall into one of the following four subcategories:
- Deposits: includes money collected from a customer that a company expects to return after a specified period of time or when certain conditions are met. For example, an electric utility may ask a customer for a deposit, which will be returned if they pay their monthly bill on time for 12 months.
- Advances: includes money paid in advance of receiving a product or service. Examples include magazine subscriptions whereby the company will book the advance to a current liability known as unearned revenue.
- Gift Certificates: payment received by a company from a customer that is redeemable for a product or service. When a company sells a gift card, it will record the receipt of cash and create a corresponding liability known as unearned revenue.
- Third-Party Collections: includes money collected from customers or employees that are payable to another party. For example, companies may be required to collect state sales tax from customers at the time of purchase. Another common example includes payroll deductions such as taxes and the employee's share of medical costs or insurance premiums. The money collected from customers or employees is considered a current liability until remitted to the third party.
Company A requires a $100 deposit from new credit customers, which is returned when they pay their invoice on time for six consecutive months. In the month of December, Company A collected $200,000 in deposits from customers. Company A was also able to return $180,000 in deposits to customers in that same month.
The journal entry to record the collection of deposits would be as follows:
|Deposits Collected from Customers||$200,000|
While the journal entry to record the return of deposits would be as follows:
|Deposits Collected from Customers||$180,000|