Definition
Contract Liability
A contract liability is an obligation to transfer goods or services to a customer for which the company has already received payment, similar to deferred revenue.
Under Ind AS 115, when a customer pays before the company performs, the company records a contract liability until it fulfils its performance obligation. It is essentially the standard's term for advances and deferred revenue arising from customer contracts.
Contract liabilities are common in project, construction and subscription businesses where customers pay milestones in advance. A rising contract-liability balance can indicate a healthy order book and future revenue, while its release into revenue reflects work delivered.
Related terms
- Accruals (Accounting)Accruals are revenues earned or expenses incurred that are recognised in the accounts before the related cash is received or paid, following accrual accounting.
- Revenue RecognitionRevenue recognition is the accounting principle determining when and how much revenue a company records, based on the transfer of goods or services to customers.
- Deferred RevenueDeferred revenue, or unearned income, is money received from customers for goods or services not yet delivered, recorded as a liability until earned.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.