What Is Unearned Revenue? A Definition and Examples for Small Businesses

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 not taken from previous examples but is intended to stand alone. When filling in a journal, there are some rules you need to follow to improve journal entry organization. You can see that a journal has columns labeled debit and credit.

Other names used for this liability include unearned income, prepaid revenue, deferred revenue and customers’ deposits. As mentioned in the example above, when an advance payment is received for goods or services, this must be recorded on the balance sheet. After the goods or services have been provided, the unearned revenue account is reduced with a debit. At the same time, the revenue account increases with a credit. The credit and debit will be the same amount, following standard double-entry bookkeeping practices.

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Once deferred revenue recognition takes place, it comes off the balance sheet. In accrual accounting, assets need equal liabilities, in the same period. Advance payments are beneficial for small businesses, who benefit from an infusion of cash flow to provide the future services. An unearned revenue journal entry reflects this influx of cash, which has been essentially earned on credit.

In some industries, the unearned revenue comprises a large portion of total current liabilities of the entity. For example in air line industry, this liability arisen from tickets issued for future flights consists of almost 50% of total current liabilities. Checking to make sure the final balance figure is correct; one can review the figures in the debit and credit columns.

ENTRY NO. 8 – APPLICATION OF UNIDENTIFIED CASH RECEIPTS – 10508

Having a debit balance in the Cash account is the normal balance for that account. We know from the accounting equation that assets increase on the debit side and decrease on the credit side. If there was a debit of $5,000 and a credit of $3,000 in the Cash account, we would find the difference between the two, which is $2,000 (5,000 – 3,000). The debit is the larger of the two sides ($5,000 on the debit side as opposed to $3,000 on the credit side), so the Cash account has a debit balance of $2,000. Common Stock had a credit of $20,000 in the journal entry, and that information is transferred to the general ledger account in the credit column.

Unearned revenue is reported on a business’s balance sheet, an important financial statement usually generated with accounting software. If a business entered unearned revenue as an asset instead of a liability, then its total profit would be overstated in this accounting period. The accounting period were the revenue is actually earned will then be understated in terms of profit. Note that this company does not record the building itself as the asset because it does not gain ownership or control (beyond these four months).

What Is Unearned Revenue? A Definition and Examples for Small Businesses

Unearned revenue is important to the accrual method of accounting. On the first of August, the company sells a machine for a total of four thousand dollars. Under accrual accounting, the four thousand dollar purchase is recorded as revenue the instant the sale is made, even if the customer does not send payment until the twentieth of August. Unearned revenue is recognized in accrual accounting, but not in cash accounting.

Understanding who buys gift cards, why, and when can be important in business planning. In the journal entry, what is unearned revenue Dividends has a debit balance of $100. This is posted to the Dividends T-account on the debit side.