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What is the entry for the down payment from a signed contract?

Author:
Harold Averkamp, CPA, MBA

Definition of Down Payment on a Contract

A down payment on a signed contract means a company has received money in advance of doing the work specified in the contract. As for the accounting, the company must record the money in its Cash account and a liability for the money received in advance of doing the work. (The contract without the money is a commitment, but is not recorded in the accounts as a liability.)

Example of a Down Payment on a Contract

Assume that TOPCO signs a contract to construct a special machine for one of its customers. The contract requires the customer to pay TOPCO $5,000 when the contract is signed and the remainder of $20,000 to be paid when TOPCO delivers the machine within 30 days of the signing.

When TOPCO receives the $5,000 down payment, it records the following:

  • Debit to the current asset Cash for the $5,000 down payment received
  • Credit the current liability Customer Deposits for $5,000

At the time TOPCO completes the special machine and receives the balance of $20,000, TOPCO will record the following entry:

  • Debit the current liability Customer Deposits for $5,000 (to remove the liability)
  • Debit the current asset Cash for $20,000
  • Credit the income statement account Revenues from Machine Construction for $25,000
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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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