Unearned Revenue: Decoding Its Significance in Business Accounting

At this point, you may be wondering how to calculate unearned revenue correctly. When a customer prepays for a service, your business will need to adjust its unearned revenue balance sheet and journal entries. Your business will need to credit one account and debit another account with the correct amounts using the double-entry accounting method. Unearned revenue liabilities will appear on your balance sheet until goods and services for the period are provided to the customer(s) who have paid early. At that time, the unearned revenue will be recognized as revenue on your income statement.

Managing unearned revenue requires adherence to specific accounting guidelines and standards. Since customers deem this prepayment for their goods and services as their assets, it adds to their sense of security that the deliverables will be delivered as promised. This, in turn, contributes to customer satisfaction and loyalty. When they pay the rest and complete the transaction, they need to adjust the accounts.

Stay up-to-date with the latest small business insights and trends!

If a business entered unearned revenue as an asset instead of a liability, then its total profit would be overstated in this accounting period. The accounting period were the revenue is actually earned will then be understated unearned revenue journal entry in terms of profit. Take note that the amount has not yet been earned, thus it is proper to record it as a liability. Now, what if at the end of the month, 20% of the unearned revenue has been rendered?

The table below shows the journal entry made when a client pays in advance for a good or service. The basic building blocks for accurate income statements and balance sheets are accurate journal entries. One such journal entry is the adjusting entry for unearned revenue.

Accounting for unearned revenue

Unearned revenue is classified as a liability (credit) as the service still needs to be provided to the customer. Sometimes customers pay us before we deliver any goods or services. Once all journal entries have been posted to T-accounts, we can check to make sure the accounting equation remains balanced. A summary showing the T-accounts for Printing Plus is presented in Figure 3.10. This is posted to the Cash T-account on the credit side beneath the January 14 transaction. Accounts Payable has a debit of $3,500 (payment in full for the Jan. 5 purchase).