Definition of Unearned Revenue in Accounting

Definition of Unearned Revenue in Accounting

Unearned Revenue

For example, in the air line industry, the unearned revenue from tickets sold for future flights consists of almost 50% of total current liabilities. Bob has only earned $100 of that revenue through his January window cleaning, therefore $1100 is unearned revenue.

In such cases, the unearned revenue will appear as a long-term liability on the balance sheet. Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered. It can be thought of as a «prepayment» for goods or services that a person or company is expected to supply to the purchaser at a later date. As a result of this prepayment, the seller has a liability equal to the revenue earned until the good or service is delivered.

Most of the subscription and support services are issued I-9 form with annual terms resulting in unearned sales revenue.

And, they choose this approach because it enables them to track manage revenues and expenses, as well as liabilities, owners equities, and assets. By contrast, Single entry accounting serves only for managing cash outflows and inflows. Unearned revenue refers to funds a seller receives for goods or services not yet delivered to the buyer. As an example, let’s say a landscaping company charges its customers $200 for five lawn-cutting services, and that its customers are required to prepay the $200 up front. As a result of this prepayment, the landscaping company now has a liability to its customers that’s equal to the revenue earned from the actual performance of the services in question.

Unearned revenue is not a line item on this balance sheet. It would go in the “liabilities” category, as it is money owing.

This means that all revenues are recorded when earned regardless of when the cash is actually received. In other words, a customer who buys a shirt on December 31 and pays for in on January 1 is considered to have bought the shirt on December 31. The retailer records a December sale.

This is why is recorded as an equal decrease in unearned revenue (a liability account) and increase in revenue (an asset account). This makes sure the equation continues to balance. Here’s an example of a balance sheet.

What is the Accounting Equation is a category of accrual under which the company receives cash before it actually provides goods or renders services. Under this cash, the exchange happens before actual goods or service is delivered and as such no revenue is recorded by the company. The company, however, is under an obligation to provide the goods or render the service, as the case may be, on due dates for which advance payment has been received by it and as such the Unearned Revenue is a Liability till the time it doesn’t completely fulfill the same and the amount gets reduced proportionally as the service is being provided by the business. It is also known by the name of Unearned Income, Deferred Revenue, and Deferred Income as well. Unearned revenue arises when payment is received from customers before the services are rendered or goods are delivered to them.

Note that when the delivery of goods or services is complete, the revenue recognized previously as a liability is recorded as revenue (i.e., the unearned revenue is then earned). Unearned Sales Revenue results in cash exchange before revenue recognition for the business.

  • Unearned revenue is great for a small business’s cash flow as the business now has the cash required to pay for any expenses related to the project in the future, according to Accounting Tools.
  • Other names used for unearned revenue are unearned income, prepaid revenue, deferred revenue and customers’ deposits.
  • When the transaction occurs, such as a publishing company selling a magazine subscription, the journal entry includes a debit to cash and a credit to unearned revenue.
  • In other words, that $40 will be converted from unearned revenue to earned revenue.
  • Interior service providers include furnace repair and maintenance, ductwork cleaning and household cleaning services.

Cash Flow Statement

Yet, the balance sheet, or statement of financial position, would show that the company increased its cash asset at the same time it incurred a liability for the transaction, as it still has to deliver the magazines to the customer. Unearned revenue is money received from a customer for work that has not yet been performed.

As the company earns that revenue, it reduces the balance in the unearned revenue account (with debit entries) and increases the balance in the revenue account (with credit entries). Once the business actually provides the goods or services, an adjusting entry is made. The unearned revenue account will be debited and the service revenues account will be credited the same amount, according to Accounting Coach. In accounting, unearned revenue is prepaid revenue. This is money paid to a business in advance, before it actually provides goods or services to a client.

This concept also applies for customers who put down deposits on sales. Deferred or is an important accounting concept, as it helps to ensure that the assets and liabilities on a balance sheet are accurately reported. It makes perfectly clear to shareholders and other involved parties that the company still has outstanding obligations before all of its revenue can be considered assets. Under this method when unearned sales revenue is received by the business, the whole amount received is recorded under an Income account and proportionately adjusted as the goods or service is delivered by the business over the period of time as goods or service is provided. Unearned revenue is the number of advance payments which the company has received for the goods or services which are still pending for the delivery and includes transactions like Amount received for the goods delivery of which is to be made on the future date etc.

He does so until the three months is up and he’s accounted for the entire $1200 in income both collected and earned out. The owner then decides to record the accrued revenue earned on a monthly basis.

This practice goes to support the matching principle that states we match revenues with expenses regardless of when the money is received. In the last accounting year (ending 30 Sep 2019) I started accounting for ticket sales differently than before, i.e. I accumulate in an “unearned revenue” account (a liability account) until after the event, and then move them in one big batch to the actual income account. For example, a contractor quotes a client $1000 to retile a shower. The client gives the contractor a $500 prepayment before any work is done.

From this point on, each month 1/12 of the value of the unearned rent received in January will be moved from the liability account to the rent revenue account. This process is a great example of the matching principle and the conservatism principle. With the advance deposit example, the income is not earned until the guest actually arrives.

Unearned Revenue