what type of account is unearned revenue

In essence, unearned revenues are generally classified as short-term liabilities because the obligation is usually fulfilled within a period of less than a year. In some cases, the delivery of goods and services may take more than a year, in this case, the unearned revenue will be recognized as a long-term liability. Unearned revenue is a type of liability account in financial reporting because it is an amount a business owes buyers or customers. Therefore, it commonly falls under the current liability category on a business’s balance sheet. It illustrates that though the company has received cash for its services, the earnings are on credit—a prepayment for future delivery of products or services. You record prepaid revenue as soon as you receive it in your company’s balance sheet but as a liability.

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Unearned revenue and deferred revenue are the same things, as are deferred income and unpaid income. These are are all various ways of referring to unearned revenue in accounting.

Unearned Revenue (Sales) Video

Unearned revenue is recorded for payments received for goods or services which have not yet been provided. A journal voucher needs to be processed in the future period or year that the goods or services are to be provided. A business will need to record unearned revenue in its accounting journals and balance sheet when a customer has paid in advance for a good or service which they have not yet delivered. Once it’s been provided to the customer, unearned revenue is recorded and then changed to normal revenue within a business’s accounting books. Also, the United States Securities and Exchange Commission has reporting requirements for businesses that are specific to revenue recognition. Revenue recognition is a generally accepted accounting principle that dictates how revenue is accounted for. According to GAAP, unearned revenue is recognized over time as the product or service is delivered, based on certain critical events.

The accrual method of accounting recognizes revenue when it is earned, rather than when cash is received. This means that when a business receives payment for goods or services that have not yet been delivered, the money is recorded as a liability on the balance sheet. This is because the business has an obligation to deliver the goods or services to the customer in the future. Once the goods or services have been delivered or performed, the liability is extinguished and the revenue is recognized. This is because the business has fulfilled its obligation to the customer, and the revenue can be considered earned. 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.

Collection of Unearned Revenue

The line item « Unearned Revenue » or « Deferred Income » gives the company a place to recognize that the cash payment has come in but the company has deferred the revenue recognition until a later date. In terms of accounting for unearned revenue, let’s say a contractor quotes a client $5,000 to remodel a bathroom. If the contractor received full payment for the work ahead of the job getting started, they would then record the unearned revenue as $5,000 under the credit category on the balance sheet.

The seller recognizes « unearned revenues » (or « deferred revenues ») as revenues received for goods and services not yet delivered. Creating and adjusting journal entries for unearned revenue will be easier if your business uses the accrual accounting method, of which the revenue recognition principle is a cornerstone. Unearned revenue refers to the money small businesses collect from customers for a or service that has not yet been provided. In simple terms, unearned revenue is the prepaid revenue from a customer to a business for goods or services that will be supplied in the future. Unearned income or deferred income is a receipt of money before it has been earned. This is also referred to as deferred revenues or customer deposits.

The Benefits of Unearned Revenue

If you are unfamiliar with ASC 606, I strongly recommend you read the related article for now and take the time to go over the entire document with your accountant at some point. Let’s look at how this works under the different accounting systems. Get deep insights into your company’s MRR, churn and other vital metrics for your SaaS business. Chat with a ScaleFactor expert today and see the what is unearned revenue software in action. When the list is displayed, you can select any payment to view the details. In this example, I am selecting the Prepayment that was just processed in the last section. Following along from the example of the paid in full event registration from the last section, this scenario illustrates the cancellation of just the program item from that original event registration.

A secure drop box is available for payment, deposit, and paperwork drop-off during general office hours. INVESTMENT BANKING RESOURCESLearn the foundation of Investment banking, financial modeling, valuations and more. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years.