What Is Unearned Revenue? A Definition and Examples for Small Businesses

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 business is providing the service. It is also known by the name of Unearned Income, Deferred Revenue, and Deferred Income as well. At the end every accounting period, unearned revenues must be checked and adjusted if necessary.

If you have noticed, what we are actually doing here is making sure that the earned part is included in income and the unearned part into liability. The adjusting entry will always depend upon the method used when the initial entry was made. You receive cash at the same moment that you earn the revenue. Since they overlap perfectly, you can debit the cash journal and credit the revenue journal. In this situation, unearned means you have received money from a customer, but you still owe them your services. The credit and debit are the same amount, as is standard in double-entry bookkeeping.

Unearned revenue is revenue or income that has been earned by a company but not yet recorded in its financial statements. This usually happens when the company has already provided the goods and services to its client but has not yet invoiced it. It’s also good practice to generate cash flow statements to best understand how deferred revenue affects cash going in and out of your business. Although it’s a liability, having a deferred revenue balance on your books isn’t necessarily a bad thing. It’s important to note that while unearned revenue offers these benefits, companies must also be mindful of their obligations to deliver the promised goods or services promptly.

Adjusting entry for unearned revenue

Let us understand how unearned revenue balance sheet documentation is carried out with the help of a few examples. These examples will give us more relevance as they have been curated keeping daily situations in mind. Let us understand the steps involved in the unearned revenue balance sheet entry through the detailed step-by-step process below. Unearned revenue can provide clues into future revenue, although investors should note the balance change could be due to a change in the business. Morningstar increased quarterly and monthly invoices but is less reliant on upfront payments from annual invoices, meaning the balance has been growing more slowly than in the past. However, unbilled revenues, the goods or services are already provided or delivered to the customers, but the company has not yet bill or issue invoices to the customers.

• We only want to recognize revenue once specific tasks have been completed, which give us full claim to the money.
• Like deferred income, accrual income can also be recorded gradually.
• This is a particularly important requirement for any large publicly-traded company.
• Unearned revenue is initially recorded as a liability and then recognized as revenue when the goods or services are provided.

Our intuitive software automates the busywork with powerful tools and features designed to help you simplify your financial management and make informed business decisions. This is in contrast to earned income, which is income generated by regular business activities, employment, or work. If you are having a hard time understanding this topic, I suggest you go over and study the lesson again.

Sometimes businesses take an advance payment on a good or service meaning they’ve been paid upfront and now they need to fulfill their end of the deal. In some cases, the business needs to reflect this in their accounting. Since the money has already been received, there is no need to rely on credit sales or worry about collecting payments in the future.

The name for the account it uses may be unearned revenues, deferred revenues, advances from customers, or prepaid revenues. You record prepaid revenue what is unearned revenue as soon as you receive it in your company’s balance sheet but as a liability. Therefore, you will debit the cash entry and credit unearned revenue under current liabilities. After you provide the products or services, you will adjust the journal entry once you recognize the money. At this point, you will debit unearned revenue and credit revenue.

AccountingTools

Basically, we want to be cautious about reporting items on financial statements. We only want to recognize revenue once specific tasks have been completed, which give us full claim to the money. Aside from the revenue recognition principle, we also need to keep the accounting principle of conservatism in mind when dealing with unearned revenue. Companies that use the accrual method of accounting are required to record unearned revenue. This is a particularly important requirement for any large publicly-traded company.

Companies that use cash accounting don’t use unearned revenue or follow GAAP. It remains on the company’s balance sheet (sometimes called a statement of financial position) as either a short-term or long-term liability. Over time, the liability gradually gets converted into income (earned revenue) as the product or service gets delivered. For deferred or unearned revenue, the customer pays in advance for goods or services that are provided later. Under the accrual basis of accounting, revenues should be recognized in the period they are earned, regardless of when the payment is received.

Accrual Concept of Accounting

No, unearned revenue will never show up on the income statement. Generally, it’s more common for companies who provide services to get paid in advance compared to those who provide a physical product. Unearned income is income that a company receives from investments or other sources that aren’t related to its main business activities.

Until the company makes the sale, the amount paid by the customer is an obligation that will result in a future economic outflow. Unearned or deferred revenue or advance payments refer to the money a company receives from customers before it has earned it. Reporting requirements for unearned revenue vary depending on the accounting standards followed by the company.

Some examples of unearned revenue include advance rent payments, annual subscriptions for a software license, and prepaid insurance. The recognition of deferred revenue is quite common for insurance companies and software as a service (SaaS) companies. Unearned revenues are common in modern business, with almost all established companies taking advances for future sales. For example, below is a snapshot of Apple Inc.’s financial statements showing ‘deferred revenues,’ which represents money they have received for future sales. The company should provide appropriate disclosure in the notes to the financial statements regarding the nature and amount of unearned revenue.

What is an IOLTA Account & 5 Mistakes to Avoid

Recognizing deferred revenue is common for software as a service (SaaS) and insurance companies. On a balance sheet, the “assets” side must always equal the “equity plus liabilities” side. Hence, you record prepaid revenue as an equal decrease in unearned revenue (liability account) and increase in revenue (asset account). It is defined as receiving payment for the service or product provided in the future. The initial step is to debit prepaid revenue under current liabilities. This can also be done under a specific unearned revenue account type.