At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent:
A) Liabilities until the product or service is provided.
B) A component of shareholders' equity.
C) Long-term assets until the product or service is provided.
D) Revenue upon receipt of the advance payment.

Question

Quizplus · Accepted Answer

Customer advances represent a future obligation to deliver goods or services. Until the goods or services are delivered, the advances should be recorded as a liability on the balance sheet. Only after providing the goods or services can the advances be recognized as revenue. Therefore, customer advances are not a component of shareholders' equity or long-term assets.

At Times, Businesses Require Advance Payments from Customers That Will