Unearned revenue also serves as an indicator of performance in the future. Retainer agreements, airline tickets, and subscription-based software are some of the businesses where this prepaid revenue occurs. Unearned revenue recognition will happen as soon as the service is provided. Customers can purchase a six-month subscription to get a discounted rate. They pay you the full amount at the beginning of the six-month period, and you perform the services over the six months.

Unearned revenue adjusting entry examples

ABC Co. receives a $10,000 advance through its bank account from a customer, XYZ Co., for future sales. Since ABC Co. has not transferred any goods or services in exchange, it must record the amount as a liability. Therefore, the accounting treatment for the transaction will be as follows. The unearned revenue is documented in the liabilities section of the balance sheet. It is always treated as a liability on the balance sheet and the main reason for this is incomplete transactions. Unearned revenue helps to ensure financial statements’ accuracy.

What is the difference between unearned revenue and accounts receivable?

If you are having a hard time understanding this topic, I suggest you go over and study the lesson again. Preparing adjusting entries is one of the most challenging (but important) topics for beginners.

How does unearned revenue appear on the three financial statements?

• After a month, ABC Co. sells $10,000 worth of goods to XYZ Co. against the amount received in advance.
• One-third of the commission received is in respect of work to be done next year.
• Another unearned revenue example would be using a service, like web hosting services.
• The unearned revenue journal entry can be recorded in both liability and income methods.

However, sometimes companies may also transfer goods and not receive funds for it but still need to record their revenue. On the other hand, companies may receive money even if they haven’t transferred goods yet. Unearned revenue always plays a vital role in the reporting of a business.

Get in Touch With a Financial Advisor

It is classified as a current liability until the goods or services have been delivered to the customer, after which it must be converted into revenue. 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. Once a delivery has been completed and your business has finally provided prepaid goods or services to your customer, unearned revenue can be converted into revenue on your balance sheet.

This is an important accounting term known as unearned revenue. Accounts receivable represents money that you’re owed for work that has already been completed and has been invoiced and awaiting payment by your customer. Unearned revenue is money that you’ve been paid for work that has yet to be done. For that reason, they appear in different places on your whats the difference between a plan a budget and a forecast balance sheet — accounts receivable is listed as an asset, while unearned revenue is listed as a current liability. Yes, unearned revenue is usually listed as a current liability on your balance sheet. This reflects the fact that this form of revenue functions as a debt to a client or customer until you deliver the product or service they have paid for.

At the end of each reporting period, the revenue to be recognized for both methods is the same. Receiving money before a service is fulfilled can be beneficial. The early receipt of cash flow can be used for any number of activities, such as paying interest on debt and purchasing more inventory.

James pays Beeker’s Mystery Boxes $40 per box for a six-month subscription totalling $240. This is why unearned revenue is recorded as an equal decrease in unearned revenue (a liability account) and increase in revenue (an asset account). Unearned revenue is listed under “current liabilities.” It is part of the total current liabilities as well as total liabilities. At the end of the month, the owner debits unearned revenue $400 and credits revenue $400. He does so until the three months is up and he’s accounted for the entire $1200 in income both collected and earned out. The owner then decides to record the accrued revenue earned on a monthly basis.

Therefore, the journal entry to record unearned revenues is as follows. Unearned revenue can be reported on your business’s balance sheet. This will be the most significant financial statement that you can generate. The entry will be documented in the short-term liabilities section. You need to credit the unearned revenue and debit the cash entry because this is a cash increase for the business. In this case one asset (accounts receivable) increases representing money owed by the customer, this increase is balanced by the increase in liabilities (unearned revenue account).

In this article, we cover the journal entry for unearned revenue transactions as well as the adjustment entry to recognize revenue when it is earned. You’ll see an example of the two journal entries your business will need to create below when recording unearned revenue. Taking the previous example from above, Beeker’s Mystery Boxes will record its transactions with James in their accounting journals. Here is an example of Beeker’s Mystery Box and what their balance sheet might look like. As you can see, the unearned revenue will appear on the right-hand side of the balance sheet in the current liabilities column.