How should advance payments received from a customer for a contract be recorded in the accounts?

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Deducted from the contract work-in-progress under assetsRecognized as a liability in the balance sheetPosted as income in the Profit & Loss accountEither recorded as a deduction from work-in-progress or as a liabilityNone of the above

Explanation

Advance payments from customers related to a contract can be accounted for in two ways: either by reducing the contract work-in-progress asset or by classifying the amount as a liability until the service or goods are delivered. Crediting it directly to the Profit & Loss account is not appropriate since the revenue is not yet earned.