Imagine you are the manager of 'Just Phones'.
Lots of customers are excited about the yet to be released iPhone7 ... so excited that 10 of them are prepared to pay the full price (assume $900 plus GST with a cost price of $500 plus GST) BEFORE the stock is available.
So the business has just received $9 000 plus $900 GST. How should we record this?
$9 900 cash has been received so it would be recorded in the Cash Receipts Journal.
Under 'Details' you would record Prepaid Sales. $9 900 would be recorded in 'Bank' $9000 would go in 'Sundry' and $900 would go in 'GST'.
How would you classify 'Prepaid Sales'?
It sounds like Sales or Revenue ... but it is a current liability!! Remember that.
Why? The business has received the money from its customers but has not supplied any stock ... yet. Thus it has an obligation to its customers. Thus, a current liability. They expect to meet this obligation in the short term (less than 12 months).
Now assume stock of iPhone7 arrives. 50 units, each at $500 plus GST. Invoice 46.
This would be recorded in the Purchases Journal (or Cash Payments Journal if it was a cash purchase of stock) as well as the iPhone7 stock card in the IN column.
The business would then ring/contact/email/text the customers who have already paid for the iPhone7s. "Come and get your new iPhone7".
The customers arrive and collect their iPhone7s. They leave happy.
How is this recorded?
The stock card would record 10 units going OUT.
The Prepaid Sales must be converted to Sales so ...
General Journal
Debit: Prepaid Sales $9 000 (this cancels out the current liability)
Credit: Sales $9 000 (this counts the sale)
Debit: Cost of sales $5 000
Credit: Stock Control $5 000.
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