What is Unearned Revenue in Accounting? Definition and Importance

What is unearned revenue?

The prepaid revenue is known as unearned revenue in accounting.  We pay this money to any business owners beforehand (advanced payment), prior to the products and services the business extends to a customer. This unearned revenue is an obligation, or unpaid money, which a company is bound to pay.  After providing products and/or services, an entry is made for adjustment according to the advance payments. As per the Accounting Coach, the unearned revenue facilities the flow of cash.

Under financial accounting,  unearned revenue is considered as an accountant. It is taken as a debt or an obligation a business is bound to pay after the completion of service tasks. It is sorted as a pending debt on the balance sheet of a business. Little businesses get unearned revenue when customers buy products or services, and the business dispatches products or executes the service. It is also termed prepaid revenue.

Following are the examples of unearned revenue:

  • Service contract paid in advance
  • Legal retainer paid in advance
  • Advance rent payment
  • Prepaid insurance
  • Unearned Revenue in the Books

The unearned revenue account dwindles with a loss, and the revenue account rises with a profit when a business gives the products or services. As soon as a business touches unearned revenue as a valuable entity, not as a load, its gross gain would be exaggerated in this accounting period. Where the revenue is won in the accounting period will be started with less intensity in terms of gain. Entering revenue gained in the same period as expenses discharged for a project encroaches on the accounting principle,  which states revenue and expenses set for identical projects should be compared.

The Importance of Unearned Revenue

Unearned revenue is valuable for a little cash flow in a business as the business enjoys the benefits of enough cash prerequisite to deal with any expenses included in the project, according to Accounting Tool.

Example of Unearned Revenue

A 20-person training session is purchased by a client worth $2—or even $100 per session. The client pays for the sessions in advance. In this case, the personal trainers have $2000 as debit cash and $2000 as credit for the unearned revenue.

The client does not take regular training sessions. After almost two months, the cline goes for five personal training sessions. It shows that the client has done 25% of her 20 already paid sessions. This way, the trainer can easily recognize 25% of unearned revenue in books. So, the unearned revenue gets $500, and the credit revenue also is $500. 

What is Unearned Revenue on a Balance Sheet?

A business balance sheet is used for unearned revenue reports. It is an important financial statement that is generated with accounting software. The unearned revenue is given under the section of liabilities.

What Is the Journal Entry for Unearned Revenue?

Unearned revenue is added to the books as a debit to the cash account or as a credit to the unearned revenue account. The credit and debit are the same amounts, but each transaction is always recorded in two accounts.

An adjusting entry is made after the business provides the goods or services. The service revenue account will be credited simultaneously after the unearned revenue account is debited. Therefore, two business entries are made at the same time.

For more useful information, browse the resources guide today!