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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Mehta Traders, a Surat firm, received Rs 60,000 in March 2025 as advance for goods that will be delivered in April 2025. Under the accrual and realisation concepts, how should the firm treat this amount in the accounts for the year ending 31 March 2025?

The Rs 60,000 is shown as a liability, an advance from customers, at 31 March 2025. Revenue is recognised only when goods are delivered, which happens in April 2025, so counting it as sales for the earlier year would overstate that year's income.

  1. ARecord it as sales revenue of the year ended 31 March 2025
  2. BShow it as a liability (advance from customers) and not as revenue for that yearCorrect
  3. CIgnore it until the goods are delivered
  4. DRecord it as a reduction of the closing stock

Explanation

Revenue is recognised when goods are delivered and the right to receive payment is established. Delivery is in April 2025, so the Rs 60,000 is an advance received, which is a liability at 31 March 2025. Treating it as sales would overstate that year's revenue.

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