What is Unearned Revenue? Example and meaning of Unearned revenue

Unknown business What is unearned revenue? What is the true meaning of Unearned revenue in your business activities? How to calculate Unearned revenue? All the above information will be answered in the following article of Viindoo.

1. What is Unearned revenue?

Unearned revenue là revenue unfulfilled. This is the amount the business receives before delivering goods or providing services to customers. This is a deposit for future revenue and will be recognized as a liability when the business receives payment from customers.

However, unrealized revenue is not considered revenue because the business has not fulfilled its obligations to customers to be recognized as revenue. In other words, unrealized revenue becomes revenue only when the business has fulfilled its obligations and is entitled to that money from customers.

Unearned revenue is unrealized revenueUnearned revenue is unrealized revenue

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2. Example of Unearned revenue

For example, on October 1, 2022, Company ABC received a 12-month land rental of $20,600. Record the adjusted journal entry for the Unrealized Revenue account at the end of the accounting period December 31, 2020.

31/12/2022 Debit Account Unearned Rent 5,150

Have Account Rent Revenue (Rent Revenue) 5,150

Revenue from leasing land for 3 months (20,600*3/12)

In this example, company ABC received a deposit for a 12-month land lease on October 1, 2022. This amount is determined as Unearned revenue because this amount is received before the time the company provides the service (land lease). Therefore, this amount should be dealt with in the books under the Unearned Rent account (debited to the Rent Received first account).

Until the service provider company (land leasing) expires at the end of the accounting period December 31, 2022, the portion of the money received will be transferred to the account Realized pre-received rental income. available (Rent Revenue). Therefore, an adjusted entry is used to record the transfer of the advance received to the Rent Revenue account after the company providing the service is eligible.

Example of Unearned revenueExample of Unearned revenue

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3. What is the meaning of Unearned revenue?

Among companies that sell subscription-based products or services that require upfront payments, unrealized revenue is one of the most common and important concepts. When a customer signs up for or pays in advance for a product or service, this amount is recorded on the company's balance sheet as a liability.

Therefore, this is considered a debt of the customer. When the product or service is delivered, this debt is converted to revenue and recognized on the company's income statement.

Unearned revenue is like customer debtUnearned revenue is like customer debt

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4. Accounting for unrealized revenue

The accounting reporting principles stipulate that unrealized revenue is a liability of the company. If the company has received payment (created a debt) but has not completed the work or delivered the goods.

The reason behind this is that even though the company has received payment from the customer, it still has to deliver the goods or provide the service. If the company cannot deliver the goods or provide the service as promised or the customer cancels the order, the company will owe the money already paid by the customer.

Therefore, the initial revenue must be recognized as a liability. Note that when delivery or service is completed, revenue previously recognized as a liability will be recognized as revenue (i.e. unrealized revenue has been realized).

In general, unrealized revenue is classified as a current liability because the obligation is usually fulfilled within one year. However, in some cases, where delivery of goods or provision of services may take more than one year, the corresponding unrealized revenue may be recognized as a long-term liability.

Unrealized revenue is a liability of the companyUnrealized revenue is a liability of the company

Hopefully the information in the above article of Viindoo It will help businesses understand better What is unearned revenue. Please carefully refer to the information shared in the article to better understand this concept!

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Jun Nguyen April 29, 2023