The modern-day business dynamic is considered to be quite different on a number of grounds. In this regard, it can be seen that almost all businesses work on credit. This implies that they sell, or purchase goods at an earlier date, and the subsequent payment for that particular date is made at a later date.
This is the general norm of almost all business entities, and it is something that is highly unavoidable for almost all business concerns. It has a number of accounting implications that organizations need to be wary about.
However, before getting to that, it is important to understand what ‘credit’ really is, and why is it unavoidable.
What is Credit and why is Credit unavoidable?
Business Credit is referred to as payment leverage that is offered by one business to another. This is because businesses need time to process raw materials, and then send them to the market so that they can be sold.
Therefore, their suppliers tend to give them leverage pertaining to payments. Business credit is considered to be a normal practice. It cannot be avoided because it is normal and the general practice of businesses.
Credit is unavoidable because it takes considerable time for products to be in a sellable condition, and in the meantime, they might not have the resources to pay their suppliers upfront. Therefore, they need credit as a breathing space that can help them to achieve the respective job descriptions.
However, when it comes to credit, credit can be owed to customers and they can also be owed from customers. These are two different terminologies, and hence, they include a number of technicalities that need to be considered in this regard.
Credit Due to Customers
As far as Credit Due to Customers is concerned, it implies that the business has taken advance from their customers, and the subsequent transaction has still not be made. It is also referred to as ‘unearned revenue’. This is because it implies that the revenue for the particular transaction has been collected, but goods (or services) against this collected revenue have not been processed. Therefore, this is the form of liability from the perspective of the company.
Credit that is due from customers is a current liability, which needs to be processed by companies in order to recognize that as an earned revenue in their financial statements. Unless the goods or services against that amount have been processed, it will continue to be classified as a current liability, because the organization is liable to process these orders in order to properly classify them as a legitimately earned revenue.
There might be a number of different reasons as to why credit might be due from customers. A lot of businesses tend to work on advance payments as security deposits from their customers. As a result, they categorize customer advances as unearned revenue, because they have collected money, and the order has still not been processed as yet.
Is Amount Due to Customers same as Accounts Payable?
Amount Due to customers is NOT the same as accounts payable. This is because accounts payable is the term that is used to denote the amount that is payable to suppliers of the company. On the contrary, the amount due to customers is a current liability, in the form of unearned revenue.
Unearned revenue needs to be settled in the form of goods and services, whereas accounts payable generally settled via cash or bank. Regardless of the fact that both are current liabilities, yet their notation is different in terms of what they actually represent.
Accounting Treatment and Journal Entry for Credit Due to Customers
The accounting treatment for credit that is due from customers is similar to that of a current liability. Therefore it is treated as a Current Liability in the Balance Sheet. In the Income Statement too, it is classified as revenue, but it is mentioned too that this particular revenue stands to be unearned, and it needs to be processed so that it is duly classified as n earned revenue.
As mentioned earlier, it can be seen that credit due to customers is considered as a current liability. Therefore, when the advance for the sale is made, the journal entry that is made in the income statement and balance sheet for credit that is due to customers is as following:
|Bank (Unearned Revenue)||xxxx|
Credit Due From Customers
Just like situations where businesses get credit from external sources, it can be seen that credit can also be extended to customers.
This accounts for instances where the goods (or services) have been provided to the customers. This is the amount that needs to be collected or received from the customers.
Credit that is due from customers is still classified as revenue because it has already been processed, and the respective amount needs to be collected from the customer to complete the sale process. It is considered to be an integral part, and this is something that should ideally be included in the financial statement.
Credit that is due from the customers is considered to be highly crucial because it is the amount that the company has not yet been paid for. Therefore, a proper account needs to be kept of the amount that is due from customers, so that the relevant collections can duly be made.
Accounting Treatment and Journal Entries for Credit due from Customers
Credit that is due from customers is considered to be a current asset. This is because the company has already serviced this order (in terms of processing the relevant goods and services). The amount that is due from customers is also referred to as Accounts Receivable. This is the representation of the debtors that the company has at a given point in time. However, the corresponding amount for this particular order has still not been received.
As a result, it is important to realize that the amount that is due from customers is a current asset, and should be mentioned as such on the balance sheet. The relevant journal entry for credit that is due from customers is as follows:
|Bank (Earned Revenue)||xxxx|
Therefore, it can be seen that credit that is due from customers is considered as a current asset. In the income statement, it is described as revenue. Therefore, these journal entries are created in order to showcase the amount that is due from customers.
Given the fact that both these terms are fairly similar, yet there is a very notable difference between the amount due to and the amount due from customers. One is the amount that the company needs to receive (i.e. amount due from customers), whereas the other is the amount that the company needs to pay the customers in the form of goods and services (i.e. amount due to customers).
In the same manner, the accounting treatment for both is also different, since one of them is considered to be a current asset, whereas the other one is a current liability. Therefore, they are represented as such in the financial statements prepared at the year-end. These differences are encapsulated in the table below:
|Amount Due To Customers||Amount Due From Customers|
|This is the amount that is payable to customers.||This is amount that is receivable from customers.|
|It is classified as a Current Liability.||It is classified as a Current Asset.|
|It is classified as Unearned Revenue.||It is classified as Earned Revenue.|