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If it is a monthly publication, as each periodical is delivered, the liability or unearned revenue is reduced by $100 ($1,200 divided by 12 months) while Unearned Revenue: Definition and Meaning revenue is increased by the same amount. For example, a company receives an annual software license fee paid out by a customer upfront on January 1.
Classic examples include rent payments made in advance, prepaid insurance, legal retainers, airline tickets, prepayment for newspaper subscriptions, and annual prepayment for the use of software. Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered. It can be thought of as a “prepayment” for goods or services that a person or company is expected to supply to the purchaser at a later date.
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Accrued revenue must be booked when there is a mismatch between the time of payment and delivery related goods/services. Accrued revenue is revenue that is recognized but is not yet realized. In other words, it is the revenue earned/recognized by a business for which the invoice is yet to be billed to the customer.
Under the liability method, you initially enter unearned revenue in your books as a cash account debit and an unearned revenue account credit. The debit and credit are of the same amount, the standard in double-entry bookkeeping. The first journal entry reflects that the business has received the cash it has earned on credit. https://simple-accounting.org/ With cash basis accounting, you’ll debit accrued income on the balance sheet under the current assets as an adjusting journal entry. Unearned revenue is recorded on a company’s balance sheet under short-term liabilities, unless the products and services will be delivered a year or more after the prepayment date.
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If all of the money is not earned, such as a cancelled contract, the transaction must be handled differently. Note that in double-entry bookkeeping the recorded debits must equal the recorded credits. This type of bookkeeping is the reason unearned revenue can be a debit or credit, depending on which accounts are increasing with transactions and which accounts are decreasing as a result of transactions. Unearned revenue is entered in the books as debit to the unearned revenue account and a credit to the cash account. In accounting, unearned revenue is treated as a liability on a company’s balance sheet. Essentially, unearned revenue is a debt that the company owes the customer. A business owner can utilize unearned revenue for accounting purposes to accurately reflect the financial health of the business.