Introduction

Amounts received before the actual earning of revenues are known as unearned revenues. They arise when customers pay in advance of the receipt of goods or services. Because the company has received cash but has not yet given the customer the purchased goods or services http://www.nhlrangersteamshop.com/adidas+kevin+klein+rangers+jersey , the unearned revenues are in fact liabilities. That is, the company must provide something in return for the amounts received.

Accounting For Unearned Revenue

There are two characteristics of adjusting entries. First, adjusting entries made at the end of an accounting period do not involve cash. Cash has either charged hands prior to the end of the period, or cash will change hands in a future period. It is precisely because cash is not changing hands on the last day of the accounting period that most adjusting entries must be made. Second, each adjusting entry involves a balance sheet account and an income statement account. In each case requiring adjustment, we are either

• Generating an asset,
• Using up an asset,
• Recording an incurred but unrecorded expense, or
• Recording revenue that has yet to be earned

Knowing that adjustment entry has at least one balance sheet and one income statement account makes the adjustment process a little easier. Once you have determined that an adjusting entry involves a certain balance sheet account, you can then focus on identifying the corresponding income statement account that requires adjustment.

Is Unearned Revenue An Asset Or A Liability?

Unearned revenues are revenues collected in advance even though they are not yet earned. In other words, the business already collected cash before it performed the services or sold the product to its customers. Unearned revenue are classified as current liabilities because the business is obligated to perform a service or sell a product in the future in exchange for the cash that it collected in advance. Typical examples of unearned revenues are collecting advanced subscription payment for magazines or newspaper, selling season tickets to sports events, collecting advanced rent from tenants, restaurants collecting deposits for reservations, lottery ticket receipts good for several drawings collected in advance, etc. It is important to record properly what portion of customer advances have been earned, which should be appropriately recorded as revenues and what portion is unearned which should be appropriately recorded as liability.

Examples Of Unearned Revenue

A building contractor may require a deposit before proceeding on construction of a house. Upon receipt of the deposit, the contractor has unearned revenue, a liability. The contractor must construct the house to earn the revenue. If the house is not built, the contractor will be obligated to repay the deposit.

Conclusion

Unearned revenue is a cash amount received before they have been earned. Unearned revenue is a tricky name for a liability. Liabilities are reported in the balance sheet. Don’t make the mistake of including unearned revenue with the revenues on the income statement.
Less Warmth Generated Along with LED Downlights Lingafelt Matalka
Submitted 2014-03-11 14:26:43
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