Friday, July 10, 2009

accounting for Unearned Revenue

Unearned Revenue is actually not revenue and is therefore not reported on the income statement. Unearned revenue occurs when the seller receive the cash from the sale of the good or service before the company has to provide the good or service. When this occurs, the seller must set up an unearned revenue account (or deferred revenue) to record the liability rather than recognize the cash received as revenue. The liability is recognized because the company now has the liability of providing the good or services that the customer paid for.
This unearned revenue account is set up as follows:
Dr Cash xxx
Cr unearned revenue xxx
When the revenue is then later earned, the deferred revenue account is closed to revenue (this being the account on the income statement).
Dr unearned revenue xxx
Cr revenue xxx
Alternatively, theses entries can be done in the reserve order and the amount collected can be initially credited to revenue account. Then, at the end of the period, the amount of this unearned revenue must be reversed out of "revenue" into "deferred revenue". Either method will provide the same amount of unearned revenue on the balance sheet and revenue on the income statements.

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