JournaldrillUnearned revenue
Cash received before the work is done or the goods delivered is a liability: debit Cash and credit Unearned Revenue (also called Deferred Revenue). As you earn it, make an adjusting entry that debits Unearned Revenue and credits Revenue for the portion earned in the period.
Syntax
Dr Cash / Cr Unearned Revenue; then Dr Unearned Revenue / Cr Service Revenue (amount earned)| Part | What it is |
|---|---|
Cash | Asset debited when the customer pays in advance. |
Unearned Revenue (Deferred Revenue) | Current liability credited for the obligation to deliver; debited as the obligation is satisfied. |
Service Revenue / Sales Revenue | Revenue credited for the part earned in the period. |
Examples
Jan 1: Dr Cash 12,000 / Cr Unearned Revenue 12,000Result: Assets up 12,000, liabilities up 12,000
Customer pays for a 12-month service contract in advance.
Jan 31 adjust: Dr Unearned Revenue 1,000 / Cr Service Revenue 1,000Result: Liabilities down 1,000, revenue up 1,000; 11,000 still unearned
One month of the contract has been delivered.
Dr Unearned Revenue 3,000 / Cr Sales Revenue 3,000Result: Liabilities down 3,000, revenue up 3,000
Goods for which a 3,000 deposit was taken are shipped to the customer.
Common mistakes
- Crediting Revenue when the deposit is received: nothing has been earned yet, so the credit goes to a liability.
- Forgetting the period-end adjustment: the liability stays overstated and revenue understated.
- Calling the liability Accounts Receivable: a receivable is money owed to you; unearned revenue is work you owe the customer.
Practice Unearned revenue
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- Unearned revenue earnedOn November 1, Peak Fitness Studio collected $4,800 for six-month memberships starting that day and credited Unearned Revenue. Record the adjusting entry on December 31.
Questions
Is unearned revenue a liability?
Yes. It represents an obligation to deliver goods or services, and it has a credit normal balance. It is shown under current liabilities.
What is the adjusting entry for unearned revenue?
Debit Unearned Revenue and credit Revenue for the amount earned during the period.
Is deferred revenue the same as unearned revenue?
Yes. The two names are used interchangeably for the same liability.
Related
- Prepaid expense adjustmentHow to record a prepayment as an asset and expense the part used each period: Dr Insurance Expense, Cr Prepaid Insurance. Prepaid rent and supplies too.
- Accrued revenueHow to record revenue earned by period end but not yet billed or collected: Dr Accounts Receivable, Cr Service Revenue. With the later collection entry.
- Cash saleHow to record a cash sale: debit Cash, credit Sales or Service Revenue. For merchandise under a perpetual system add Dr Cost of Goods Sold, Cr Inventory.
- Closing entriesHow to close the books: close revenues and expenses to Income Summary, close Income Summary to Retained Earnings, then close Dividends. Worked example.