Unearned Revenue Definition, How To Record, Example

Unearned Revenue Definition, How To Record, Example

unearned revenue journal entry

Unearned revenue is recorded on a company’s balance sheet as a liability. It is treated as a liability because the revenue has still not been earned and represents products or services owed to a customer. As the prepaid service or product is gradually delivered over time, it is recognized as revenue on the income statement. The credit to the unearned revenue account shows an increase in the company’s liabilities since the company owes products or services to the customer that made the prepayment.

Lost and found: Booking liabilities and breakage income for unredeemed gift cards – Journal of Accountancy

Lost and found: Booking liabilities and breakage income for unredeemed gift cards.

Posted: Sun, 01 Feb 2015 08:00:00 GMT [source]

Recording unearned revenues and similar prepayments can be challenging. Most commonly, unearned revenue is wrongfully recorded as an asset instead of a liability. When revenue is recorded in the general ledger, there is a certain way to do it. This is because the revenue received ends up on the income statement, and the cash is on the balance sheet of the organization’s financial reports. Revenue is when a sale is made, or a service is provided to the customer, which is paid for by them.

Adjusting Entries: Unearned Revenue (Cash Basis to Accrual Method)

Likewise, the unearned revenue is a liability that the company records for the money that it receives in advance. The adjusting entry for unearned revenue will depend upon the original journal entry, whether it was recorded using the liability method or income method. And so, unearned revenue should not be included as income yet; rather, it is recorded as a liability. This liability represents an obligation of the company to render services or deliver goods in the future. It will be recognized as income only when the goods or services have been delivered or rendered. In the case of unearned revenue, once a prepayment has been made by the customer, the business will record such a prepayment as a debit to the cash account and a credit to the unearned revenue account.

Under the income method, the first journal entry to record the advance receipt is directly recorded to the revenue account. As mentioned above, because the goods or services have not been delivered or rendered, such receipt shall not be recorded as revenue. Therefore, there is another adjusting entry to transfer some unearned portion to the unearned revenue account. Unearned revenue, sometimes referred to as deferred revenue, is payment received by a company from a customer for products or services that will be delivered at some point in the future. The term is used in accrual accounting, in which revenue is recognized only when the payment has been received by a company AND the products or services have not yet been delivered to the customer. To stay compliant, entities must record unearned revenue as a liability on the balance sheet.

How should a company disclose unearned revenue in its financial statements?

In this journal entry, the company recognizes the revenue during the period as well as eliminates the liability that it has recorded when it received the advance payment from the customers. Unearned revenue is a liability account which its normal balance is on the credit side. The amount of unearned revenue in this journal entry represents the obligation that the unearned revenue journal entry company has yet to perform. Revenue is only included in the income statement when it has been earned by a business. In the world of accounting, unearned revenue requires adjustments and corrections to ensure accurate representation of a company’s financial statements. This section will discuss necessary adjustments and handling overstatements and understatements.

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