Why is unearned revenue necessary

FreshBooks has online accounting software for small businesses that makes it easy to generate balance sheets and view your unearned revenue. Unearned revenue is originally entered in the books as a debit to the cash account and a credit to the unearned revenue account. The credit and debit are the same amount, as is standard in double-entry bookkeeping.

Also, each transaction is always recorded in two accounts. This journal entry reflects the fact that the business has an influx of cash but that cash has been earned on credit. It is a pre-payment on goods to be delivered or services provided. Once the business actually provides the goods or services, an adjusting entry is made. The unearned revenue account will be debited and the service revenues account will be credited the same amount, according to Accounting Coach.

Unearned revenue and deferred revenue are two ways of referring to the same idea: revenue that has been received but has not yet been earned. Deferred revenue is also called deferred income. Both these terms refer to advances from customers. You can unsubscribe at any time by contacting us at help freshbooks.

Unearned revenue may be a liability on the books but it does have many benefits for small business owners. Wondering if requesting deposits will alienate customers? Advanced payments, retainers, and deposits are all different ways to collect a very important liability on your books: Unearned revenue.

Despite its name, unearned revenue is not actually revenue—yet. You collect it in advance, as prepayment before completing a project or delivering a service for a client. Which means it will initially go under your liability account. It also goes by other names, like deferred income, unearned income, or deferred revenue. When doing your bookkeeping, how do you record unearned revenue? And any revenue that has not been realized i. Once the project is delivered, an adjusting entry must be made.

Unearned revenue may be a liability on the books but there are three major benefits for small business owners:. At this point, you will debit unearned revenue and credit revenue. When you receive unearned revenue, it means you have taken up front or pre-payments before the actual delivery of products or services, making it a liability. However, over time, it converts to an asset as you deliver the product or service.

Therefore, you will record unearned revenue on your balance sheet under short-term liabilities—unless you will deliver the products or services a year or more after receiving the prepayment.

When you receive unearned revenue, you will record it on your business balance sheet first and then make the journal entry. First, you will debit prepaid revenue under current liabilities or the specific unearned revenue account type.

Later, you will make the necessary adjusting journal entries once you recognize part of or the entire prepaid revenue amount. You report unearned revenue on your business' balance sheet, a significant financial statement you can generate with accounting software.

You record it under short-term liabilities or long-term liabilities where applicable. Since it is a cash increase for your business, you will debit the cash entry and credit unearned revenue. Where unearned revenue on the balance sheet is not a line item, you will credit liabilities. On a balance sheet, the "assets" side must always equal the "equity plus liabilities" side.

Hence, you record prepaid revenue as an equal decrease in unearned revenue liability account and increase in revenue asset account. It ensures the equation balances. Under the liability method, you initially enter unearned revenue in your books as a cash account debit and an unearned revenue account credit. The debit and credit are of the same amount, the standard in double-entry bookkeeping. Additionally, you record each transaction in two accounts.

The first journal entry reflects that the business has received the cash it has earned on credit. Once the business provides the products or services paid for, you will make an adjusting entry. Here, you will debit the unearned revenue account for the amount you recognize and credit the product or service revenue account for a similar amount.

Therefore, you will make two journal entries for the unearned revenue for receiving it and earning it. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products.

List of Partners vendors. Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered. It can be thought of as a "prepayment" for goods or services that a person or company is expected to supply to the purchaser at a later date. As a result of this prepayment, the seller has a liability equal to the revenue earned until the good or service is delivered.

This liability is noted under current liabilities, as it is expected to be settled within a year. Unearned revenue is also referred to as deferred revenue and advance payments. Unearned revenue is most common among companies selling subscription-based products or other services that require prepayments. Classic examples include rent payments made in advance, prepaid insurance , legal retainers, airline tickets, prepayment for newspaper subscriptions, and annual prepayment for the use of software.

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. It is treated as a liability because the revenue has still not been earned and represents products or services owed to a customer. As the prepaid service or product is gradually delivered over time, it is recognized as revenue on the income statement.