Why is Unearned Revenue a Liability?
When the company receives the payment from the customer, Unearned Revenue or Deferred Revenue is created to represent the advance payment. Below you’ll find everything you need to know about unearned revenue and how it affects your small business. 6) Other Operating Revenues – Other revenues not classified in any of the other categories are recorded as other operating revenues.
If that’s the case, unearned revenue is listed with long-term liabilities. Also, the United States Securities and Exchange Commission has reporting requirements for businesses that are specific to revenue recognition. Revenue recognition is a generally accepted accounting principle that dictates how revenue is accounted for. According to GAAP, unearned revenue is recognized over time as the product or service is delivered, based on certain critical events.
Is unearned revenue an equity account?
The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments.
An advance payment is made ahead of its normal schedule such as paying for a good or service before you actually receive it. Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle. He received his masters in journalism from the London College of Communication. Daniel is an expert https://www.bookstime.com/ in corporate finance and equity investing as well as podcast and video production. Many or all of the products here are from our partners that pay us a commission. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
Example #1 of Unearned Income
For example, ABC marketing agency signs up for a marketing automation software, ‘Yoohoo’, that’s billed quarterly at $600 for a three-user package. Twenty days into the subscription period, the agency realizes that they need two more users to access the software. Furthermore, unearned revenue is classified as the agency also requested Yoohoo to provide an exclusive training session. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.