How To Calculate Unearned Revenue

The common accounts used are.

How to calculate unearned revenue. Unearned revenue is a liability on the balance sheet. When a business takes in unearned revenue it must record the payment by debiting its cash account for the amount of money received in advance and crediting its unearned revenue account. Recording deferred revenue applies to the company s balance sheet. Usually this unearned revenue on the balance sheet is reported under current liabilities.

However if the unearned is not expected to be realized as actual sales then it can be reported as a long term liability. You must recognize the earned income from the two sessions you provided in the current month. Revenue increases by the same amount. In the example from part 1 the company receives a 120 advance payment relating to a twelve month magazine subscription.

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. This creates another 40 credit to sales and a 40 debit to unearned revenue. In this example 100 is multiplied by the five months remaining for an unearned premium amount of 500. Debiting the unearned revenue account decreases the liability by 12.

Multiply the monthly amount by the periods remaining in the policy. There are two ways of recording unearned revenue. Thus if it plows five times during the first month of the winter it could reasonably justify recognizing 25 of the unearned revenue calculated as 5 20. Divide 144 by 12 months to determine the cost of a monthly subscription.

So if the publications are to be delivered monthly every time each monthly portion is delivered the current liability unearned revenue is reduced by 4 000 24 000 divided by six months. Unearned revenue deferred income advances from customers etc. Under the liability method a liability account is recorded when the amount is collected. When the company receives payment.

Record the deferred revenue. In this scenario debit unearned revenue for 12 since that is the portion of revenue the company has earned. 1 the liability method and 2 the income method.