Unearned Revenue
Definition: Unearned revenue (also called deferred revenue) is a liability that arises when a company receives payment from a customer before delivering the pr…
Unearned revenue (also called deferred revenue) is a liability that arises when a company receives payment from a customer before delivering the promised goods or services. Because the performance obligation has not yet been fulfilled, the cash received cannot be recognized as revenue under accrual accounting. Instead it is recorded as a current liability on the balance sheet. As the company delivers goods or performs services over time, the unearned revenue is reduced and revenue is recognized on the income statement. Common examples include annual software subscriptions paid upfront, prepaid rent, gift cards, airline tickets purchased in advance, and retainer fees. Under ASC 606, revenue is recognized when (or as) control of the promised goods or services transfers to the customer.
| Account | Debit | Credit |
|---|---|---|
| 1. Receive advance payment | ||
| Customer pays $3,600 for 6 months of service. | ||
| CashAsset+ | $3,600 | |
| Unearned RevenueLiability+ | $3,600 | |
| Liability—company owes future service. | ||
| 2. Recognize revenue as earned | ||
| One month of service delivered: $3,600 / 6 = $600. | ||
| Unearned RevenueLiability− | $600 | |
| Service RevenueRevenue+ | $600 | |
| Liability decreases as obligation is fulfilled. | ||
T-AccountsA visual representation of a ledger account shaped like the letter T. Left side shows debits, right side shows credits.
Related Reports
- Balance Sheet(Primary — Current liability)
Related Subjects
See Also
- CashPaired in entry: Record deferred revenue
- RevenuePaired in entry: Recognize deferred revenue
- Subscription RevenuePaired in entry: Record subscription revenue (monthly)
External Links
- Deferred income — Wikipedia