A contract to perform future services for a customer is not reported on the balance sheet of the company that will be providing the services.  For example, if Company Jay and one of its customers sign a contract in December agreeing that Company Jay will deliver $20,000 of services beginning in January, the contract is not reported on Company Jay's December 31 balance sheet. (If the customer makes a deposit of $3,000 at the time of signing the contract, the $3,000 will be recorded by Company Jay in December with a $3,000 debit to Cash and a $3,000 credit to the liability account Customer Deposits or Unearned Revenues. With no downpayment or advance payment in December, there is no entry recorded.)

The $20,000 contract is not reported as an asset on Company Jay's December 31 balance sheet. The reason is that Company Jay has not earned any of the contract amount and therefore does not have a right or a receivable to the $20,000 as of December 31. Similarly, Company Jay's income statement for December and its December 31 owner's equity cannot include any earnings associated with the contract.

Learn Accounting: Gain unlimited access to our seminar videos, flashcards, visual tutorials, exams, business forms, and more when you upgrade to PRO.