Journal Entries of Unearned Revenue
The following unearned revenue journal entry example provides an understanding of the most common type of situations where such a Journal Entry account for and how one can record the same as there are many situations where the Journal Entry for Unearned Revenue pass, it is not possible to provide all the types of examples. Unearned Revenue is where the money is received, but the goods and services are yet to be delivered. As per the revenue recognition concept, it cannot be treated as revenue until the goods or services are provided. Therefore it is treated as a current liability.
Steps to Unearned Revenue Journal Entries
- Step 1: Divide the amount received for providing goods or rendering services by the number of months of services/goods for which the amount is received. For example, professional fees of $6,000 are received for six months. Therefore $6,000 divided by 6, which is $1,000, would be recognized as income for each month.
- Step 2: Debit the cash/bank account with the total amount received, i.e., $6,000, and create a current liability of unearned revenue by crediting the same amount. Since the cash is received, it is the creation of the asset. Therefore, the corresponding debits. The revenue is yet to be earned by the business, and hence the same is credited as a liability.
- Step 3: At the end of each month, the liability of unearned revenue would be reduced by $1,000 by debiting the amount and revenue would be increased by crediting the same amount.
How to Record?
- When the unearned revenue is received – In this situation, cash is received, and a current revenue arises. It is recorded as under:
- When the unearned revenue is earned – In this situation, the liability of unearned revenue decreases, and revenue increases, the entry is recorded as under:
Unearned revenue concept is common in the industries where payments are received in advance. Some common examples of unearned income are service contracts like housekeeping, insurance contracts, rent agreements, appliance services like refrigerator repair, tickets sold for events, etc.
Unearned Revenue Journal Entry Examples
Few examples of unearned revenue journal entry are stated below:
On 1st April, a customer pays $5,000 for installation services, which are to be rendered in the next five months. The amount received would be recorded as unearned income (current liability) in books. Subsequently, the liability of unearned revenue would decrease, and revenue would be recognized each month.
Following journal entries would be recorded:
On 1st March, the landlord receives rent for 12 months in advance, amounting to $12,000. The rent received would be recognized in books as advance rent, and $1,000 would be treated as rental income each month. Following journal entries would be recorded:
On 31st May, a contractor received $100,000 for a project which is to be executed over ten months. The total amount received would be recorded as unearned income as the project is yet to be completed. The income of $10,000 would be recognized as income for the next ten months in the books of the contractor.
On 5th June, an insurance company received a premium of $24,000 from Mr. XYZ for 12 months. Since the period covered is 12 months, the initial amount received would be recorded as a liability in books of insurance providers. Subsequently, every month $2,000 would be recognized as income. The following journal entries would be recorded:
On 10th June, a chartered accountant received $20,000 for the filling of half-yearly returns for the year. Since the amount pertains to two returns to be filled every six months, the revenue ($10,000) would be recognized at the end of each six months in the books. The following journal entries would be recorded:
On 10th August, a trader received advance payment for goods worth $2,000, which are to be delivered in a subsequent month. The amount received would be treated as unearned revenue till the time goods are delivered. Post the delivery. The amount would be recognized as income in books. The following journal entries would be recorded:
The above entries are recorded following revenue recognition. Revenue recognition concept states that the revenue should be recognized when the goods are delivered or services are rendered, and there is a certainty of realization of payment. Therefore any unearned income should not be recognized as revenue and should be treated as a liability until the mentioned conditions are fulfilled.
This article has been a guide to Unearned Revenue Journal Entry. Here we discuss what is Unearned Revenue and how to record journal entries of unearned revenue. You can learn more about accounting from the following articles –