What Is Unearned Revenue? (2024)

FAQs

What is an example of unearned revenue? ›

A few typical examples of unearned revenue include airline tickets, prepaid insurance, advance rent payments, or annual subscriptions for media or software. For example, imagine that a customer purchases an annual subscription for a streaming music service. The customer pays $50 up front for the full year of service.

Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered. It is recorded on a company's balance sheet as a liability because it represents a debt owed to the customer.

Two examples of unearned income you might be familiar with are money you get as a gift for your birthday and a financial prize you win. Other examples of unearned income include unemployment benefits and interest on a savings account.

Unearned revenue is listed under “current liabilities.” It is part of the total current liabilities as well as total liabilities. On a balance sheet, assets must always equal equity plus liabilities. Both sides of the equation must balance.

Unearned revenue or deferred revenue is recorded as a liability in journal entries. Upon receiving payment, a debit entry is made to the cash account, and a corresponding credit entry is made to the unearned or deferred revenue account, reflecting the revenue recognition principle.

Unearned revenue is not recorded on the income statement as revenue until “earned” and is instead found on the balance sheet as a liability. Over time, the revenue is recognized once the product/service is delivered (and the deferred revenue liability account declines as the revenue is recognized).

Unearned revenue, also known as prepaid revenue or deferred revenue, is a fundamental concept in accounting. It represents the funds a company receives in advance for goods or services it is yet to deliver or perform. This advance payment is a liability on the company's balance sheet, signifying a future obligation.

Treatment of unearned income

In general, in 2023 the first $1,250 worth of a child's unearned income is tax-free. The next $1,250 is taxed at the child's income tax rate for 2023. Any unearned income above $2,500, however, is taxed at the marginal tax rate of the parent(s), that is usually higher than the child's rate.

Unearned income, also known as passive income, is derived from sources other than employment or business operations and can act as a financial safety net during times of job loss or financial crisis. It can also be a significant source of income during retirement.

First, let's explore definitions. Earned income is what you receive from actively working. It includes wages, salaries, and self-employment income. Unearned income is from anything other than work, unemployment, retirement, investments, etc.

How to calculate unearned income? ›

How to calculate unearned revenue (with examples) Calculate your monthly unearned revenue by dividing the total amount of cash you received from customers by the number of months (period) for which you agreed to provide services.

The term is used in accrual accounting, in which revenue is recognized only when the payment has been received by a company AND the products or services have not yet been delivered to the customer.

Deferred revenue is common with subscription-based products or services that require prepayments. Examples of unearned revenue are rent payments received in advance, prepayment received for newspaper subscriptions, annual prepayment received for the use of software, and prepaid insurance.

That said, unearned revenue is a liability, not an asset. It's an obligation, not a resource. Your company has made a commitment to your customers, and until you deliver on that promise—be it a service or a product—you owe them.

Gift card purchases are generally classified as a deferred revenue liability. The cash received from the sale is paid upfront but does not qualify for revenue recognition as no goods or services have been exchanged.

For example, a company might provide consulting services to a client in December, but not issue an invoice until January of the following year. In this case, the company would record the revenue as “accrued” in December and recognize it as “received” in January, when the invoice is paid.