What Is Unearned Revenue?

Consumers, meanwhile, generate deferred revenue as they pay upfront for an annual subscription to the magazine. A publishing company may offer a yearly subscription of monthly issues for $120. This means the business earns $10 per issue each month ($120 divided by 12 months). Once goods or services have been rendered and a customer has received what they paid for, the business will need to revise the previous journal entry with another double-entry.

Your business needs to record unearned revenue to account for the money it’s received but not yet earned. Recording unearned revenue is important because your company can’t account for it until you’ve provided your products or services to a paying customer. It’s important to rely on accounting software like QuickBooks Online to keep track of your unearned revenue so that you can generate accurate and timely financial statements each accounting period. 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.

The truth about unearned revenue

In order to balance the cash that the company receives in such a transaction, the company books the value of the goods or services that it’s obligated to provide as unearned revenue, which is a liability. 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. The owner then decides to record the accrued revenue earned on a monthly basis. The earned revenue is recognized with an adjusting journal entry called an accrual. Once the $1200 has been received, the company enters this amount as a credit to unearned revenue.

Revenue is recorded when it is earned and not when the cash is received. If you have earned revenue but a client has not yet paid their bill, then you report your earned revenue in the accounts receivable journal, which is an asset. Unearned revenue, sometimes called deferred revenue, is when you receive payment now for services that you will provide at some point in the future. Under this method, when the business receives deferred Revenue, a liability account is created. The basic premise behind using the liability method for reporting unearned sales is that the amount is yet to be earned. Till that time, the business should report the unearned revenue as a liability. Deferred RevenueDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future.

Unearned revenue in cash accounting and accrual accounting

Suppose a customer pays $1,800 for an insurance policy to protect her delivery vehicles for six months. Initially, the insurance company records this transaction by increasing an asset account with a debit and by increasing a liability account with a credit. After one month, the insurance company makes an adjusting entry to decrease what is unearned revenue and to increase revenue by an amount equal to one sixth of the initial payment. Under the liability method, you initially enter unearned revenue in your books as a cash account debit and an unearned revenue account credit.

Higher Unearned income highlights the strong order inflow for the company and also results in good liquidity for the business as a whole. Because the business has been paid but no product or service has been rendered, unearned revenue is considered a liability. The liability converts to an asset over time as the business delivers the product or service. Deferred revenue is an advance payment for products or services that are to be delivered or performed in the future. At the end of the second quarter of 2020, Morningstar had $287 million in unearned revenue, up from $250 million from the prior-year end.

What is Unearned Revenue?

The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period. Because there is a possibility that the services may not be performed they present a risk to the company. While it’s assumed that money will one day be recognized, it can’t be guaranteed until the work is performed. Therefore, it belongs as a liability until the risk of repayment is gone. Initially, the total amount of cash proceeds received is not allowed to be recorded as revenue, despite the cash being in the possession of the company.

ScaleFactor is on a mission to remove the barriers to financial clarity that every business owner faces. We’ve compiled a list of terms we think business owners should know. An accrued expense is recognized on the books before it has been billed or paid. When firms pay taxes before they are due, they create “prepaid expense.”