Why Do Unearned Revenue Accounts Have To Be Adjusted

If accounts are adjusted at the end of each month the relevant journal entries are given below.

Why do unearned revenue accounts have to be adjusted. Adjusting entries pose difficulties for students but they are actually very logical. By performing the services the company earns revenue and cancels the liability. Hence 1000 of unearned income will be recognized as service revenue. T accounts are really helpful when doing adjusting entries because you can visualize what is happening.

Accounts are usually adjusted at the end of an accounting period when financial statements have to be prepared. A partial adjusted trial balance of piper company at january 31 2014 shows the following. At the end of the period unearned revenues must be checked and adjusted if necessary. At december 31 2016 one third of the commission revenue 3 600 1 3 will be converted into unearned commission liability.

There are two ways of recording unearned revenue. The seller must either provide the services or return the customer s money. We are told that 2 500 has been earned. At the end of january the total value of the services provided to mr.

Here is the t account for unearned revenue. It is recorded on a company s balance sheet as a liability. Unearned revenue also referred to as deferred revenue usually at the start of the adjustment process the accountant prepares an updated trial balance to provide a visual organized representation of all ledger account balances. The liability account credited may be unearned revenue revenue received in advance advances by customers or some similar title.

1 the liability method and 2 the income method. Supplies 810 prepaid insurance 3 060 salaries and wages payable 910 unearned service revenue. Unearned revenue is a liability account and therefore the normal balance is a credit. Entry on january 01 when advance payment is received.

It may be seen that the amount of adjusting entry under both the methods is different but final amounts are the same i e cash received 3 600 commission revenue 2 400 and unearned commission 1 200. Service revenue will in turn affect the profit and loss account in the shareholders equity section. We are told the account has an unadjusted balance of 4 000. Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered.

Adjusting entry on january 31 to convert a portion of unearned revenue a liability to earned revenue.