Unearned revenue, also known as deferred revenue, is money received by a company for a product or service that has yet to be delivered or performed. This concept is commonly seen in many businesses. For example, if a publishing company collects a year’s subscription fee upfront, they have the cash but they do not earn the revenue until they deliver the monthly magazines to the customer. Unearned revenue is considered a liability for the company until the service or product is rendered, transferring it to the earned revenue category.
1. How is unearned revenue recorded in the books?
Unearned revenue is recorded as a liability on a company’s balance sheet. When the company receives upfront payment, it debits (increases) the cash account and credits (increases) the unearned revenue account. When the service is rendered or product delivered, unearned revenue is debited (decreased), and the revenue account is credited (increased).
2. What types of businesses typically have unearned revenue?
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Many businesses have unearned revenue such as subscription-based businesses like magazines or streaming services, insurance companies that require upfront payments, rental companies that require a prepayment, and businesses that have service contracts such as cleaning services or lawn care services.
3. Is unearned revenue a good or bad thing for a company?
Unearned revenue is not necessarily a bad thing. It’s a sign that customers are willing to pay upfront for the goods or services, which can positively impact a company’s cash flow. However, it does put pressure on the company to fulfill its obligations in order to recognize it as earned revenue.
4. Can an individual have unearned revenue?
An individual can have unearned revenue if they receive advance payment for a service or product they are to deliver in the future. Freelancers or independent contractors often have unearned revenue from projects they’re working on.
5. How does unearned revenue affect income tax?
For tax purposes, unearned revenue is usually not taxable until it becomes earned. However, tax laws can vary, so it’s advisable to consult with a tax advisor or CPA to understand the tax implications.