Accounts Receivable

by David Bazile
(Manhattan )

Hi again Kathy

In the business that I work at, the owner purchases materials to make products to sale. Usually that's the process in a retail business. The owner does not offer credit sales but sometimes the customers makes deposits on the order article of clothing to produce. Would that be considered a Sale and also an Accounts Receivable transaction? When the owner finishes with producing the article of clothing, the customer comes to pay the rest of the balance. What are your thoughts on that?

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Hi David!

When a customer makes a down payment on a product, that would not be a Sale yet, it's what we call 'unearned income'.

You can enter the cash payment as a prepayment on Accounts Receivable, but since you don't sell on credit, that may be misleading.

You should enter the cash payment as revenue, like this:

Debit: Cash...........$500
Credit: Unearned Revenue......$500

The Unearned Revenue account is a liability, as you now owe the customer that product.

When you deliver the final goods, and the customer pays in full, enter the full Sales price as revenue, then debit Unearned Revenue for the down payment amount, then debit the amount of the final payment to Cash.

Hope that helps!

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