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CMA Foundation · Fundamentals of Financial and Cost Accounting · Four Frameworks of Accounting and Forms of Organization

Gupta Enterprises received ₹30,000 in March 2025 as advance for goods that will be delivered in April 2025. The financial year ends on 31 March. Under the accrual and realisation concepts, how should the ₹30,000 be treated in the year ended 31 March 2025?

The ₹30,000 is shown as a liability, advance received from the customer, because the goods are not delivered before the year end. Revenue is recognised on delivery, not on receipt of cash, so it becomes sales only in the following year.

  1. ARecorded as sales revenue of that year
  2. BRecorded as a liability (advance from customer), not revenueCorrect
  3. CIgnored until the goods are paid for again
  4. DRecorded as profit because cash has been received

Explanation

Revenue is recognised when goods are delivered and the risk passes, not when cash is received. Until delivery in April, the ₹30,000 is an obligation to deliver goods, so it is shown as a liability. Treating it as sales would overstate the year's profit.

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