Unearned Revenue Definition, Accounting Treatment, Example

These expenditures require an ordinance or resolution to authorize the project, establish the assessment roll, adopt the debt amortization schedule, or accept the grant award. Then, at the end of each month, you can recognize revenue for that month with a journal entry. The best way to calculate unearned revenue is to use an accounting software program that can keep track of all your transactions and generate reports accordingly. This will help you stay on top of your finances and make sure that you’re making sound decisions when it comes to pricing and delivery timelines. Under accrual accounting, when a business earns revenue, it records the full amount as income.

You can also use it to sort and analyze revenue received by criteria or automate amortization schedules. Unearned revenue is the prepayment a company gets from customers for goods or services. The customer makes the prepayment in expectation of being delivered the good or service. It is an indicator that a business has the money to manage costs, fund investments, and reap sizable profits.

Accrued revenue FAQ

Then, as it delivers goods or services, it adjusts its books accordingly. A balance sheet is an accounting tool used to list a company’s assets, debts, and owner’s capital. The sum of all current and long-term debt, as well as all short-term and non-current obligations, must equal the sum of all the company’s current assets and all long-term and non-current investments. This “unearned” or “accrued” income on the income statementIncome StatementThe Income Statement (or Statement of Profit and Loss) shows performance from operations of a business. ProfitWell Recognized allows you to customize your financial reporting and statements. For example, you can use it to set standard controls, rules, and methods to recognize revenue in a particular way.

What happens when a business receives payments from customers before a service has been provided? Here’s how to handle this type of transaction in business accounting. Unearned revenue is most common among companies selling subscription-based products or other services that require prepayments.

Services

While you might deposit the money into your bank account, the revenue isn’t really yours until you deliver the product or service, so it shouldn’t show up on your income statement. You report unearned revenue on your business’ balance sheet, a significant financial statement you can generate with accounting software. You record it under short-term liabilities (or long-term liabilities where applicable).

Unearned revenue is also utilized for accounting purposes to accurately reflect the company’s financial health. Hence understanding whether unearned revenue is an asset is important. In accrual accounting, it is important to organize income properly, especially when it comes to prepaid services. Unearned revenue is a liability and is treated in a very unique way. Determining the value of operating activities for a business’s cash flow statement is an important part of preparing the disclosures a business needs to make to its investors.

Example 2 – Asset / expense adjusting entry for prepaid insurance

In other industries that involve regular monthly services, you might offer a discount if, say, the customer prepays for the next six months. Deferred expenses, similar to prepaid expenses, refer to expenses that have been paid but not yet incurred by the business. Common prepaid expenses may include monthly rent or insurance payments that have been paid in advance. For example, a SaaS company may acquire a customer who needs a service for the next six months.

This helps business owners more accurately evaluate the income statement and understand the profitability of an accounting period. Below we dive into defining deferred revenue vs deferred expenses and how to account for both. With cash basis accounting, you’ll debit accrued income on the balance sheet under the current assets as an adjusting journal entry. Unearned revenues are payments for future services to be performed or goods to be delivered. Advance customer payments for newspaper subscriptions or extended warranties are unearned revenues at the time of sale.

In summary, unearned revenue is an asset that is received by the business but that has a contra liability of service to be done or goods to be delivered to have it fully earned. This work involves time and expenses that will be spent by the business. And this is a piece of information that has to be disclosed to complete bookkeeping for startups the image about the financial situation at that moment in time. Under the cash basis of accounting, deferred revenue and expenses are not recorded because income and expenses are recorded as the cash comes in or goes out. This makes the accounting easier, but isn’t so great for matching income and expenses.

Of course, you will want to be sure that you can fulfill your obligations to your customer. In essence, an accrued expense represents a company’s obligation to make a cash payment in the future. Therefore, they are recorded as current liabilities in the balance sheet.

When the product or service has been delivered to the client, the revenue is then recorded on the company’s income statement as either sales revenue or service revenue. This depends on whether the revenue was earned from selling a product or providing a service. Revenue earned from the sale of a product is recorded as sales revenue and that earned from a service rendered is considered service revenue. A prepayment adjusting entry would be noted on the books for January. You also need to enter a credit of $4800 to the deferred revenue account.