What Is Unearned Revenue?

Contracts can stipulate different terms, whereby it’s possible that no revenue may be recorded until all of the services or products have been delivered. In other words, the payments collected from the customer would remain in deferred revenue until the customer has received in full what was due according to the contract. Unearned revenue is most often a short-term liability, meaning that the business enters a delivery agreement with the customer or client and must fulfill its obligations within a year of purchase. Services that will take over a year to deliver upon should be marked as a long-term liability on the balance sheet. These adjustments and corrections help ensure that financial statements of a business accurately reflect its revenue and liabilities.

Upon receipt of the payment, the company’s accountant records a debit entry to the cash and cash equivalent account and a credit entry to the deferred revenue account for $1,200. Businesses can profit greatly from unearned revenue as customers pay in advance to receive their products or services. The cash flow received from unearned, or deferred, payments can be invested right back into the business, perhaps through purchasing more inventory or paying off debt. A company should clearly disclose unearned revenue within its financial statements, typically as a part of the balance sheet. It is usually listed under the current liabilities section, as it represents obligations that are expected to be settled within one year. Clear disclosure helps ensure transparency and accurate financial reporting for investors and other stakeholders.

Unearned revenue definition

Unearned revenue, also known as deferred revenue or prepaid revenue, is money received by a company for a service or product that has yet to be provided or delivered. This type of revenue is recorded as a liability because the company owes the delivery of goods or services to its customers. Your business needs to record unearned revenue to account for the money it’s received but not yet earned.

Unearned revenue, also known as deferred revenue or prepaid revenue, refers to the payments received by a company for goods or services that are yet to be delivered or provided. It is recorded as a liability on the company’s balance sheet because the company owes the delivery of the product or service to the customer. Examples of industries dealing with unearned revenue include Software as a Service (SaaS), subscription-based products, airline tickets, and advance payments for services. 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.

Publishing and Prepaid Services

An easy way to understand deferred revenue is to think of it as a debt owed to a customer. Unearned revenue must be earned via the distribution of what the customer paid for and not before that transaction is complete. By delivering the goods or service to the customer, a company can now credit this as revenue.

• These payments are recorded as liabilities until the goods or services are provided, at which point they are recognized as revenue.
• In certain instances, entities such as law firms may receive payments for a legal retainer in advance.
• Deferred revenue is recognized as a liability on the balance sheet of a company that receives an advance payment.
• QuickBooks offers a wide range of financial reporting capabilities, along with expense tracking and invoice features.

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. Note that when unearned revenues are amounts received in advance from customers for future products or services 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 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.

What is the correct method to record an entry of unearned revenue in accounting?

Each activity in a publisher’s business strategy can benefit from the resulting cash flow of unearned revenue. A variation on the revenue recognition approach noted in the preceding example is to recognize unearned revenue when there is evidence of actual usage. For example, Western Plowing might have instead elected to recognize the unearned revenue based on the assumption that it will plow for ABC 20 times over the course of the winter.