Introduction:
TechCo, a company that manufactures electronic gadgets, delivered finished goods to a customer. Before delivering the finished goods,TechCo received partial payment from the customer (“Advance Payment”). The customer paid the remaining balance (including VAT) when TechCo delivered the finished goods.
The Situation:
TechCo sold 200 units of finished goods to a customer. Each unit was sold for $150. The total sales amount before VAT was $30,000. Since the sale was subject to a 10% VAT, the customer had to pay an additional $3,000 in VAT, making the total amount due $33,000.
The customer made a partial payment of $10,000 to TechCo in advance, and the remaining $23,000 (which includes the VAT) was paid to TechCo upon delivery of the finished goods.
Case Facts:
Number of units sold: 200
Price per unit: $150
Total sales (before VAT): $30,000
VAT (10%): $3,000
Total amount paid by the customer: $33,000
Advance payment: $10,000
Remaining payment upon delivery: $23,000
IFRS Journal Entries
Now, let’s think about how TechCo would record this transaction in their accounting books according to IFRS (International Financial Reporting Standards). TechCo needs to make the following journal entries:
1. When the advance payment is received by TechCo:
Debit: Cash/Bank for the advance payment amount.
Credit: Deferred Revenue for the same amount (since the goods haven't been delivered yet).
2. When the goods are delivered by TechCo to the customer and the remaining payment is received from the customer by TechCo:
Debit: Cash/Bank for the remaining payment amount.
Debit: Deferred Revenue to recognize the revenue for the advance payment.
Credit: Sales Revenue for the total sales amount (before VAT).
Credit: VAT Payable for the VAT collected from the customer.
Can You Figure Out the IFRS Journal Entries?
Based on the information provided:
1. When the advance payment is received by TechCo:
Debit: Cash/Bank for $10,000 (advance payment received)
Credit: Deferred Revenue for $10,000 (to record the advance payment before goods are delivered)
2. When the goods are delivered by TechCo to the customer and the remaining payment is received from the customer by TechCo:
Debit: Cash/Bank for $23,000 (remaining payment received including VAT)
Debit: Deferred Revenue for $10,000 (to recognize the revenue from the advance payment)
Credit: Sales Revenue for $30,000 (total sales amount before VAT)
Credit: VAT Payable for $3,000 (VAT collected from the customer)
Explanation:
Cash/Bank (Debit): Increases as TechCo receives the payments from the customer.
Deferred Revenue (Credit/Debit): Initially recorded when the advance payment is received and then reduced when the goods are delivered and revenue is recognized.
Sales Revenue (Credit): Represents the revenue earned from the sale of the finished goods.
VAT Payable (Credit): Represents the VAT collected from the customer, which TechCo must remit to the government.
This case study demonstrates how TechCo recorded the direct sale of finished goods involving advance payment and cash. The journal entries ensure that all aspects of the transaction are accurately recorded in TechCo’s financial records.
Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.
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