Contract Asset or Contract Liability: Who Owes Whom Performance?
Customer pays first usually points to a liability. Company performs first but payment remains conditional usually points to a contract asset.
Contract liability
When the customer pays before the company satisfies the corresponding performance obligation, the company generally records a liability until revenue is earned.
Contract asset
A contract asset arises when goods or services have been transferred but the right to consideration remains conditional on something other than the passage of time.
Receivable
A receivable generally exists once the right to payment is unconditional except for the passage of time.
Exam strategy
Ask who performed first and whether the right to payment is unconditional.
The takeaway
Contract liability means the company still owes performance. Contract asset means the company performed but does not yet have an unconditional receivable.
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FAQ
Is a contract asset always the same as accounts receivable?
No.
Is a customer deposit usually revenue immediately?
Not merely because cash was received.
Can contract balances change during a long-term contract?
Yes.