Unearned revenue

Definition

Unearned revenue is a liability representing money received by a business for services not yet performed or goods not yet delivered. It is recorded on the balance sheet and reflects the company's obligation to deliver these future services or goods.

5 Must Know Facts For Your Next Test

1. Unearned revenue is initially recorded as a liability on the balance sheet.
2. It converts to earned revenue as the service is performed or goods are delivered.
3. Common examples include advance payments for subscriptions, rent, and insurance.
4. Adjusting entries are required to recognize earned revenue over time.
5. Failure to properly account for unearned revenue can result in misstated financial statements.

Review Questions

• Why is unearned revenue considered a liability?
• How does unearned revenue transition to earned revenue?
• What types of transactions typically involve unearned revenue?

Related terms

Accrued Revenue: Revenue that has been earned but not yet received in cash or recorded.

Deferred Revenue:

Another term for unearned revenue, indicating liabilities for payments received before delivering services or goods.

Current Liability:

A company’s debts or obligations that are due within one year, including unearned revenue.