How unearned revenue fuels growth

Unearned revenue represents money that has been paid by a customer, but which has not yet been delivered. This money is typically held in escrow until the work is completed, at which point it is transferred to the company’s bank account. If the service is eventually delivered to the customer, the revenue can now be recognized and the following journal entries would be seen on the general ledger. In the case of accounts receivable, the remaining obligation is for the customer to fulfill their obligation to make the cash payment to the company in order to complete the transaction. The concept of accounts receivable is thereby the opposite of deferred revenue, and A/R is recognized as a current asset. Media companies like magazine publishers often generate unearned revenue as a result of their business models.

In accounting terms, we say that the matching principle has been violated as the revenue is recognized once while the related expenses are not being recognized until the last periods. You’ve decided to begin a new revenue stream for your mid-sized employee engagement company. Where before you would facilitate similar programming across your book of business, you now want to offer premium services to enterprise level clients. To sign on to the premium experience, clients https://www.vizaca.com/bookkeeping-for-startups-financial-planning-to-push-your-business/ may opt-in by paying $5,000 for events, perks, and quality assurance that will occur over the next 6 months. The influx of cash flow as clients opt-in is an exciting moment, especially for small businesses, but it’s important to take responsibility for how this transaction is recorded, applied, and what they represent. Let’s say you have a converted customer who makes a booking for your annual SaaS subscription services in January valued at $12,000 ($1000 per month).

Assets vs Liability: Why Is Unearned Revenue A Liability?

From the date of initial payment, the payment is recorded as revenue on a monthly basis until the entirety of the promised benefits is confirmed to have been received by the customer. Current assets are receivables that a company will get within a year. Generally, they are transactional where money is exchanged for a service/good in real-time.

Accrual accounting classifies deferred revenue as a reverse prepaid expense (liability) since a business owes either the cash received or the service or product ordered. Sierra Sports would see an increase to Cash (debit) for the payment made from the football league. The revenue from the sale of the uniforms is $600 (20 uniforms × $30 per uniform). Unearned Uniform Revenue accounts reflect the prepayment from the league, which cannot be recognized as earned revenue until the uniforms are provided.

Why does Deferred Revenue matter?

In these cases, the unearned revenue should usually be recorded as a long-term liability. A few typical examples of unearned revenue include airline tickets, prepaid insurance, advance rent payments, or annual subscriptions for media or software. The first is as a debit to the cash account to represent that work has yet to be performed by the company to “earn” the advance payment. The second entry is as a credit to unearned revenue; the value of which is available funds for the work to be performed.