Once the business actually provides the goods or services, an adjusting entry is made. The unearned revenue account will be debited and the service revenues account will be credited the same amount, according to Accounting Coach. This is money paid to a business in advance, before it actually provides goods or services to a client. When the goods or services are provided, an adjusting entry is made. Unearned revenue is helpful to cash flow, according to Accounting Coach.

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Utilities provide the service (gas, electric, telephone) and then bill for the service they provided based on some type of metering. As a result the company will incur the utility expense before it receives a bill and before the accounting period ends. Sometimes companies collect cash from their customers for goods or services that are to be delivered in some future period. Such receipt of cash is Bookkeeping for Veterinarians recorded by debiting the cash account and crediting a liability account known as unearned revenue. This procedure is known as the postponement or deferral of revenue. At the end of the accounting period, the unearned revenue is converted into earned revenue by making an adjusting entry for the value of goods or services provided during the period.

Unearned Revenue Journal Entry Bookkeeping Explained

Conversely, revenues and profits would be understated in following periods when revenues went unrecognized but expenses related to providing goods and services were recognized. The balance sheet is adjusted as the business provides the purchased goods or services, resulting in a reduction of currently existing liabilities. This is reflected on the balance sheet as a debit to the unearned revenue account and a credit to the balance of the revenue account. On 1st April, a customer paid $5,000 for installation services, which will render in the next five months. The amount received would be recorded as boo’s unearned income (current liability). Subsequently, unearned revenue liability would adjusting entries decrease, and revenue would be recognized monthly.

• Atthe period end, the company would record the following adjustingentry.
• Following the golden rule of accounting debit and credit rules, every debit has a corresponding credit.
• To do so would overstate the company’s actual revenues and profits during a specific period.
• So we’re going to have a credit to revenue for $600, right?
• He does so until the three months is up and he’s accounted for the entire $1200 in income both collected and earned out.

Balance Sheet

It’s like peeling an onion one layer at a time—except without the tears.

Adjusting Entries: Unearned Revenue: Study with Video Lessons, Practice Problems & Examples

• We arrived at the $1,200 by dividing the total payment of $14,400 by 12 months.
• So let’s think about the important dates and let’s start here in the blue boxes and then we’ll talk about the cash basis to accrual in the next video for the red boxes.
• The purpose is to allocate the cost to expense in order to comply with the matching principle.
• If so, this amountwill be recorded as revenue in the current period.
• Notice that the ending balance in the asset Accounts Receivable is now $7,600—the correct amount that the company has a right to receive.
• To prevent this, organizations should provide ongoing training for accounting teams to ensure familiarity with current standards and practices.

The balance in the asset Supplies at the end of the accounting year will carry over to the next accounting year. Unearned revenue is considered a liability because it represents an obligation to provide goods or services in the future. When a business receives payment in advance, it has not yet earned the revenue and must fulfill its commitment to the customer. For example, if a tutor receives $1,000 for future tutoring sessions, this amount is recorded as unearned revenue. As the tutor provides the tutoring sessions, the liability decreases, and revenue is recognized. This accounting treatment ensures that the financial statements accurately reflect the business’s obligations and earned revenue.

So we’re going to debit it by $400, that brings the revenue account to a credit balance of $600, which is what we want, right? An adjusting journal entry includes credits and debits of various liabilities and assets. Following the matching principle, each adjusting entry should include an equal credit and debit amount. Previously unrecorded service revenue can arise when a companyprovides a service but did not yet bill the client for the work.This means the customer has also not yet paid for services. Sincethere was no bill to trigger a transaction, an adjustment isrequired to recognize revenue earned at the end of the period. Neglecting proper documentation is a common mistake when recording adjusting entries.

For our newspaper example, you’d debit unearned revenue by $10 and credit revenue by $10 each month. The adjusting entry for unearned revenue will depend upon the original journal entry, whether it was recorded using the liability method or income method. Many experts list only four types of adjusting entries is unearned revenue a current liability while others list five, six, or seven. These categories can include prepaid expenses, depreciation, accrued expenses, accrued income, unearned income, bad debts, and other allowances. It looks like you just follow the rules and all of the numbers come out 100 percent correct on all financial statements. Some companies engage in something called earnings management, where they follow the rules of accounting mostly but they stretch the truth a little to make it look like they are more profitable.