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Explanation: Advance from Customers refers to the money a company receives in advance for goods or services it has not yet delivered. It represents a liability on the company’s balance sheet because the company is obligated to fulfill the orders or provide the services for which it has received payment in advance.
Many businesses, especially in sectors like manufacturing or services, may receive payments from customers before delivering the products or services. This is common in industries with made-to-order products or services that require significant lead time.
Example: A construction company in India may require customers to make an advance payment before starting a project. If a customer pays ₹1,00,000 upfront for a construction project, the company records this amount as “Advance from Customers” on its balance sheet. As the company completes milestones or delivers parts of the project, it recognizes revenue and reduces the liability by the corresponding amount.
Advance from Customers is crucial for businesses as it provides working capital upfront, but it also comes with the responsibility of delivering as promised to the customers. It’s essential for companies to manage these advances carefully to ensure they meet their obligations.
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