Definition
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.
Explanation
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.
Example
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:
Debit | Credit | |
Cash | $200,000 | |
Deposits Collected from Customers | $200,000 |
While the journal entry to record the return of deposits would be as follows:
Debit | Credit | |
Deposits Collected from Customers | $180,000 | |
Cash | $180,000 |
Related Terms
The financial accounting term current liabilities are generally defined as any debts that must be paid within one year or one operating cycle, whichever is longer. Current liabilities are a subcategory of liabilities, which appear on a company's balance sheet.
Moneyzine EditorNovember 6th, 2024
The financial accounting term determinable current liabilities refers to near-term debt obligations that can be precisely measured. To qualify as a determinable current liability, the debt obligation is reasonably expected to come due in a single operating cycle or one year. There must also be certainty about the existence of the obligation, as well as the amount owed.Moneyzine EditorNovember 6th, 2024
The term advances from customers refers to money collected by a company prior to providing a product or service. Advances from customers are oftentimes collected when businesses sell prepaid subscriptions or gift certificates.Moneyzine EditorJanuary 4th, 2024
The term collections for third parties refers to money collected from customers on behalf of another entity. The most common examples include sales and payroll taxes. When a company collects this money, the intention is to eventually transfer it to the third party. Following the receipt of this cash, the company would classify the collections as a current liability on the balance sheet.Moneyzine EditorJanuary 11th, 2024- The term refundable deposits refers to cash collected from credit customers that a company expects to return after a specified period of time, or when certain conditions are satisfied. When companies collect this money, the intention is to return it after a relatively brief period of time. Following the receipt of the cash, the company would classify the refundable deposit as a current liability on the balance sheet.Moneyzine EditorSeptember 21st, 2023
The term accrued liabilities refers to unpaid expenses resulting from contractual agreements with another party. Accrued liabilities appear as a current liability on a company's balance sheet, and include items such as income taxes, the company's share of payroll taxes, property taxes, and compensated absences.Moneyzine EditorJanuary 3rd, 2024
