These are are all various ways of referring to unearned revenue in accounting. Because it is money you possess but have not yet earned, it’s considered a liability and is included in the current liability section of the balance sheet. This liability is recognized as an obligation for the company because they owe to their customers in terms of products or services. We see that the cash account increases, but the unearned revenue liability account also increases. The recognition of unearned revenue relates to the early collection of cash payments from customers.

• Many people mistakenly use the terms “unearned rent” and “prepaid rent” interchangeably, but in fact, they are two distinct concepts.
• We would like to describe two methods of accounting for prepaid expenses.
• Likewise, recording the unearned rent as revenue will result of the overstatement of revenue on the income statement and the understatement of liabilities on the balance sheet.
• That being said, unearned rent does not remain a liability forever.
• If it is a monthly publication, as each periodical is delivered, the liability or unearned revenue is reduced by $100 ($1,200 divided by 12 months) while revenue is increased by the same amount.
• Accurate accounting for unearned rent is essential to ensure that financial statements are accurate and reflect the true financial position of the landlord.

Under the cash basis of accounting, the landlord does not have any unearned rent. This example journal entry doesn’t involve the income statement account because both the prepaid rent and cash amount go on the balance sheet. Therefore, this journal entry covers increasing one asset (the prepaid rent) and decreasing another asset (the cash account). 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. So, a prepaid account will always be represented on the balance sheet as an asset or a liability. When the prepaid is reduced, the expense is recorded on the income statement.

Is Unearned Revenue a Liability?

In such cases, the unearned revenue will appear as a long-term liability on the balance sheet. Unearned revenue should be entered into your journal as a credit to the unearned revenue account and as a debit to the cash account. This journal entry https://www.bookstime.com/ illustrates that your business has received cash for its service that is earned on credit and considered a prepayment for future goods or services rendered. Once deferred revenue recognition takes place, it comes off the balance sheet.

Some examples of unearned revenue include advance rent payments, annual subscriptions for a software license, and prepaid insurance. The recognition of deferred revenue is quite common for insurance companies and software as a service (SaaS) companies. Unearned revenue, sometimes referred to as deferred revenue, is payment received by a company from a customer for products or services that will be delivered at some point in the future. With smaller companies, other line items like accounts payable (AP) and various future liabilities likepayroll, taxes, and ongoing expenses for an active company carry a higher proportion. Businesses make advance payments for a variety of different expenses.

Examples of Unearned Revenue

Instead, unearned rent is debited when it is received and credited when it is earned. Media companies like magazine publishers often generate unearned revenue as a result of their business models. For example, the publisher needs the cash flow to produce content through its various teams, market the content compelling to reach its audience, and print and distribute issues upon publication.

To account for this unearned rent, the landlord records a debit to the cash account and an offsetting credit to the unearned rent account (which is a liability account). Instead, any rent payments received are recorded as income at once. These services require prepayments for the delivery of those services. Businesses can profit greatly from unearned revenue as is unearned rent a liability customers pay in advance to receive their products or services. The cash flow received from unearned, or deferred, payments can be invested right back into the business, perhaps through purchasing more inventory or paying off debt. Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered.