Contract assets are assets that arise when a company provides goods or services to customers and has an enforceable right to receive payment from them. Typically, these assets are recorded on the company`s balance sheet as a result of a contract between the company and its customers.
Contract assets can arise in several ways. For example, if a company provides goods or services to a customer but has not yet received payment for those goods or services, the company will record a contract asset on its balance sheet. This asset represents the amount that the company expects to receive from the customer in the future.
Another way that contract assets can arise is when a company receives a payment from a customer in advance of providing goods or services. In this case, the company records a liability for the prepayment, and a contract asset for the amount that it will earn from the customer once it provides the goods or services.
Contract assets are typically subject to certain accounting principles and are recognized as assets when the revenue recognition criteria are met. In general, a contract asset will only be recognized on the balance sheet when the company has performed its obligations under the contract, and when the collection of the amount owed by the customer is reasonably assured.
When a company recognizes a contract asset on its balance sheet, it is important to ensure that the asset is properly disclosed in the notes to the financial statements. The notes should provide information on the nature of the contract asset, the expected timing and manner of payment, and any significant risks that could affect the realization of the asset.
In conclusion, contract assets are an important component of a company`s balance sheet and can arise when a company provides goods or services to customers and has an enforceable right to receive payment from them. These assets are subject to certain accounting principles and are recognized on the balance sheet when the revenue recognition criteria are met. It is essential for companies to properly disclose contract assets in their financial statements to provide investors and other stakeholders with a clear understanding of their financial position.