Unearned Revenue In Accounting Equation

Following the accrual concept of accounting unearned revenues are considered as liabilities.

Unearned revenue in accounting equation. Unearned revenue is when you get paid for services or products before you ve actually delivered the service or products. Accounting for unearned revenue unearned revenue is usually classified as a current liability for the business that receives it. Unearned revenue accounts for money prepaid by a customer for goods or services that have not been delivered. The accounting equation assets liabilities owners equity means that the total assets of the business are always equal to the total liabilities plus the total equity of the business.

For one it keeps the balance sheet and the accounting equation in balance. You see revenue or income is on the right side of the accounting equation as it results in more profit and more for the owner owners equity increases. For this transaction the accounting equation is shown in the following table. It leads to an increase in cash balance of the company since the goods or service is to be provided in future the unearned income is shown as a liability in the balance sheet of the company which resulted in a proportional increase on both sides of the balance sheet asset and.

Hence they are also called advances from customers. Unearned revenue also known as unearned income deferred revenue or deferred income represents revenue already collected but not yet earned. This makes sure the equation continues to balance. This is true at any time and applies to each transaction.

Companies must maintain the timeliness and accuracy of their accounts payable process. When a business takes in unearned revenue. 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. Unearned revenue accounting when a company receives cash for the goods or services that it will provide in future.

This is advantageous from a cash flow perspective for the seller who now has the cash to perform the required services. Unearned revenue is money received from a customer for work that has not yet been performed.