Once the prepaid service or product is delivered, it transfers over as revenue on the income statement. Unearned revenue is a type of liability account in financial reporting because it is an amount a business owes buyers or customers. Therefore, it commonly falls under the current liability category on a business’s balance sheet.

• After four months, the company can recognize 33% of unearned revenue in the books, equal to $400.
• Occurs when a legal entity has more debts than assets or can’t pay off debts on time.
• It is an indicator that a business has the money to manage costs, fund investments, and reap sizable profits.
• Although they sound similar, unearned income and unearned revenue aren’t the same thing.
• She has been writing about personal finance and budgeting since 2008.

Even though a payment has been received it is not considered income immediately. So it stays on your balance sheet until services or products are delivered. It is good accounting practice to keep it separated in a deferred income account. Since the deliverable has not been met, there is potential for a customer to request a refund. 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).

Accounting for Unearned Revenue

Taking the previous example from above, Beeker’s Mystery Boxes will record its transactions with James in their accounting journals. After James pays the store this amount, he has not yet received his monthly boxes. Therefore, Beeker’s Mystery Boxes would record $240 as unearned revenue in their records.

The earned revenue is recognized with an adjusting journal entry called an accrual. It’s categorized as a current liability on a business’s balance sheet, a common financial statement in accounting. Revenue is recorded when it is earned and not when the cash is received. If you have earned revenue but a client has not yet paid their bill, then you report your earned revenue in the accounts receivable journal, which is an asset.

Benefits of Unearned Revenue

You won’t see accrued revenue on the books for very long in most businesses. That’s because accrued revenue only exists when money has been earned, but not yet invoiced. At some point, the business will either need to provide the goods or services that does unearned revenue go on the income statement were ordered, or give cash back to the customer if they aren’t able to fulfill the order. That’s why it’s a liability — until you’ve done the work, the money isn’t truly yours yet. 2) The company has received payment for the goods or services.

Positive cash flow can keep a small business’s operations thriving. However, a business owner must ensure the timely delivery of products to its consumers to keep transactions steady and drive customer retention. This is why it is crucial to recognize unearned revenue as a liability, not as revenue.

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A lawn service company offers customers a special package of five applications of fertilizers and weed treatments for $300. However, the customer must prepay in December for the five treatments that will be done between April and September. When the company receives the $300 in December, it will debit the asset Cash for $300 and will credit the liability account Unearned Revenues. Since these are balance sheet accounts , there are no revenues to be reported in December. In April when the first service is provided, the company will debit the liability account Unearned Revenues for $60 and will credit the income statement account Service Revenues for $60.