Unearned Revenue Journal Entry Example

Generally, it’s more common for companies who provide services to get paid in advance compared to those who provide a physical product. For example, getting paid upfront means you don’t need to chase up customers for overdue invoices or wonder when you’re going to receive the money. As an example, we note that Salesforce.com reports unearned revenue as a liability (current liabilities). You will, therefore, need to make two double-entries in your business’s records when it comes to unearned revenue, once when it is received, and again when it is earned. Monthly unearned revenue can be calculated by dividing the total amount by the number of months for which the service was provided. This can be particularly beneficial for startups or businesses with limited working capital, as it allows them to cover operational expenses or invest in growth initiatives.

📆 Date: May 3-4, 2025🕛 Time: 8:30-11:30 AM EST📍 Venue: OnlineInstructor: Dheeraj Vaidya, CFA, FRM

• The amount of unearned revenue in this journal entry represents the obligation that the company has yet to perform.
• It’s recommended to consult with a qualified accountant or refer to the applicable accounting standards for detailed guidance on reporting unearned revenue in a particular jurisdiction.
• Many professional service providers, such as law firms, marketing agencies, consultants, and IT service providers, require clients to pay a retainer before work begins.
• And so, unearned revenue should not be included as income yet; rather, it is recorded as a liability.
• Unearned revenue is recorded on the liabilities side of the balance sheet since the company collected cash payments upfront and thus has unfulfilled obligations to their customers as a result.

Unearned revenue, also known as unearned income, deferred revenue, or deferred income, represents proceeds already collected but not yet earned. Following the accrual concept of accounting, unearned revenues are considered as liabilities. Hence, the unearned revenue account represents the obligation that the company owes to its customers. The amount in this account will be transferred to revenue when the company fulfills its obligation by delivering goods or providing services to its customers. Creating and adjusting journal entries for unearned revenue will be easier if your business uses the accrual accounting method, of which the revenue recognition principle is a cornerstone.

Journal Entries

The concept of accounts receivable is thereby the opposite of deferred revenue, and A/R is recognized as a current asset. However, since you have not yet earned the revenue, unearned revenue is shown as a liability to indicate that you still owe the client your services. Deferred revenue affects the income where is unearned revenue recorded statement, balance sheet, and statement of cash flows differently.

After James pays the store this amount, he has not yet received his monthly boxes, so Beeker’s Mystery Boxes would record $240 as unearned revenue in their records. James enjoys surprises, so he decides to order a six-month subscription service to a popular mystery box company from which he will receive a themed box each month full of surprise items. James pays Beeker’s Mystery Boxes $40 per box for a six-month subscription totalling $240.

If you are unfamiliar with ASC 606, I strongly recommend you read the related article for now and take the time to go over the entire document with your accountant at some point. Keep customers using your service and head-off churn before it happens. View all your subscriptions together to provide a holistic view of your companies health. CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path.

Use Baremetrics to monitor your subscription revenue

The initial entry for this liability is a debit to cash, and a credit to the unearned revenue account. Deferred revenue (aka unearned revenue) gets recorded on a company’s balance sheet as a liability. On July 1, Magazine Inc would record $0 in revenue on the income statement, since none of the money has been earned yet. Cash on the balance sheet would increase by $60, and a liability called unearned revenue would be created for $60 to offset it.

Examples of Unearned Revenue

• It represents an obligation for the company to deliver the product or service at a future date.
• It contains the advance payments that are received from the customer for the inaccessible service or the product.
• Companies with high operational costs, such as manufacturing, construction, and professional services, use advance payments to cover expenses before delivering goods or completing work.
• Unearned revenue examples include subscriptions, advance payments for products, retainer fees, and deposits for services.
• The recognition of deferred revenue is quite common for insurance companies and software as a service companies.

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. Once, the company fulfills its obligation by providing the goods or services to the customers, it can make the journal entry to transfer the unearned revenue to the revenue as below. Unearned revenue or deferred revenue is considered a liability in a business, as it is a debt owed to customers. It is classified as a current liability until the goods or services have been delivered to the customer, after which it must be converted into revenue. On receiving unearned revenue, the first record will be made on the business balance sheet and then in the journal entry. Many professionals are often confused about whether to consider unearned revenue as a debit or credit.

Software & Tech

However, since the business is yet to provide actual goods or services, it considers unearned revenue as liabilities, as explained further below. This is money paid to a business in advance, before it actually provides goods or services to a client. When the goods or services are provided, an adjusting entry is made. On a balance sheet, the “assets” side must always equal the “equity plus liabilities” side. Hence, you record prepaid revenue as an equal decrease in unearned revenue and increase in revenue . Unearned revenue is always listed as a liability on a company’s balance sheet.

Making Journal Entries For Unearned Revenue

Since the money has already been received, there is no need to rely on credit sales or worry about collecting payments in the future. This lowers the risk of bad debts and improves the company’s overall financial health. Per accrual accounting reporting standards, revenue must be recognized in the period in which it has been “earned”, rather than when the cash payment was received. Unearned revenue provides businesses with cash upfront, which can be used for operating expenses or investments.

Now, what if at the end of the month, 20% of the unearned revenue has been rendered? Failing to record unearned revenue correctly can lead to misstated earnings, compliance issues, and regulatory fines. Public companies must follow GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) to ensure accurate revenue recognition.

ABC Co. provided repair service to its customer in which it charged $150 for the service on 15 December 2018. Since they overlap perfectly, you can debit the cash journal and credit the revenue journal. In this situation, unearned means you have received money from a customer, but you still owe them your services. This adjustment continues each month until the entire $12,000 has been recognized as earned revenue.

Basically, ASC 606 stipulates that you recognize internally and for tax purposes revenue as you perform the obligations of your sales contract. Baremetrics provides an easy-to-read dashboard that gives you all the key metrics for your business, including MRR, ARR, LTV, total customers, and more. Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.

The business has not yet performed the service or sent the products paid for. On 31st May, a contractor received $100,000 for a project to be executed over ten months. The $10,000 would be recognized as income for the next ten months in the contractor’s books. The total amount received would be recorded as unearned income as the project is yet to be completed. At the end of each accounting period, businesses update their financial statements to reflect revenue that has been earned and the amount still classified as a liability.

In this journal entry, the company recognizes the revenue during the period as well as eliminates the liability that it has recorded when it received the advance payment from the customers. Unearned revenue refers to the money small businesses collect from customers for a or service that has not yet been provided. In simple terms, unearned revenue is the prepaid revenue from a customer to a business for goods or services that will be supplied in the future. It is defined as receiving payment for the service or product provided in the future. Unearned revenue can be reported on your business’s balance sheet.