Unearned Revenue Accounting Definition

Accrual accounting is an.

Unearned revenue accounting definition. If a customer pays for good services in advance the company does not record any revenue on its income. Unearned revenue sometimes referred to as deferred revenue deferred revenue deferred revenue is generated when a company receives payment for goods and or services that it has not yet earned. Following the accrual concept of accounting unearned revenues are considered as liabilities. This is why unearned revenue is recorded as an equal decrease in unearned revenue a liability account and increase in revenue an asset account.

It is a liability because even though a. Unearned revenue also called deferred revenue is the liability or amount of money owed for payment of goods or services by a customer before the goods or services have been delivered to that customer in other words if a customer pays for a good or service before the company delivers it the company has to recognize that it owes the customer for that good or service. What is unearned revenue. This is advantageous from a cash flow perspective for the seller who now has the cash to perform the required services.

Sales revenue once the product or service has been delivered to the customer. Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered. The revenue is transferred from the unearned revenue to the earned revenue account i e. Unearned revenue is the same thing as deferred revenue.

So lets now turn to an example and see what the normal journal entries are in the accounting for unearned revenue. To learn more see explanation of adjusting entries. Unearned revenue also known as unearned income deferred revenue or deferred income represents revenue already collected but not yet earned. Our trusty abc ltd has its month end april 20xx accounts to prepare.

Unearned revenue example and journal entries. Unearned revenue is a liability for the recipient of the payment so the initial entry is a debit to the cash account and a credit to the unearned revenue account. This makes sure the equation continues to balance. Unearned revenue is money received from a customer for work that has not yet been performed.

In accounting unearned revenue is a liability. A liability account that reports amounts received in advance of providing goods or services. Hence they are also called advances from customers. In accrual accounting revenue is only recognized when it is earned.

Freshbooks has online accounting software for small businesses that makes it easy to generate balance sheets and view your unearned revenue.