Unearned revenue
Financial reporting - balance sheet - liabilities - accruals accounting.
Unearned revenue is amounts for services for which payment has been received by the business, but which has not yet been earned.
It is a liability that recognises our obligation to provide services in the future, for which we have already been paid.
Also known as deferred income.
- Example: Five-year licence
- Our business is providing services under five-year licences, payable by our customers in advance.
- Our accounting year runs from 1 January to 31 December.
- One of our customers has paid us in advance - at the start of January - for a five-year licence.
- We recognise the revenue in our income statement spread over the full five years.
- At the end of the first year, 4/5 of the total received from the customer is Deferred income.
- We have a liability / obligation to provide a further four years of service, for which we have already been paid in advance.
Unearned revenue is recorded as a credit balance in the balance sheet.
(The related accounting entries for the initial receipt being
- DEBIT Cash asset in the balance sheet and
- CREDIT Unearned revenue or deferred income liability in the balance sheet.)
Deferred income is a liability of the reporting entity to provide the services that the customer has already paid for.
For reporting presentation purposes it is often aggregated with Accruals, as 'Accruals and unearned revenue (or deferred income)'.
As the previously unearned revenue is earned in subsequent reporting periods, the amount remaining in the balance sheet is reduced, and the income is recognised in the Income statement.
The related accounting entries are:
- DEBIT Unearned revenue or deferred income in the balance sheet, reducing the remaining net credit balance;
- CREDIT Revenue in the income statement.
