Unearned Revenue

What is unearned revenue?

Unearned revenue is a future liability of the business to its customer to provide services or sell goods under the certain conditions.

The business recognizes unearned revenue, when cash is received from the customer, however the actual sale has not been performed yet.

Accounting Principle

This accounting principle is in line with the accrual accounting principle, when transactions are not recorded as cash is received, however are recorded, when actual transaction takes place.

Usually it is a confusion: is unearned revenue a liability or is unearned revenue an asset?

Based on the essence of this concept it is liability, i.e. future obligation of the business to sell goods or provide services to the customer.

Unearned Revenue on the Balance Sheet

Unearned revenue on the Balance Sheet is recorded under liability side.

The following unearned revenue journal entry is recorded:

D Cash (money received from customer) – Asset side

C Unearned Revenue (obligation to provide services or sell goods) – Liability side

Usually it is Current Liability, since such obligation is current and to be fulfilled within 12 months.

However, also it can be Long-Term Liability. For example unearned services revenue in case of a long-term contract, duration of which is more that 12 months.