Adjusting Entry for Unearned Revenue

Note that this does not include the interest portionof the payments. On the balance sheet, the current portion of thenoncurrent liability is separated from the remaining noncurrentliability. No journal entry is required for this distinction, butsome companies choose to show the transfer from a noncurrentliability to a current liability.

Cash Management Strategies

No journal entry is required for this distinction, but some companies choose to show the transfer from a noncurrent liability to a current liability. However, during the company’s current operating period, any portion of the long-term note due that will be paid in the current period is considered a current portion of a note payable. A note payable is usually classified as a long-term (noncurrent)liability if the note period is longer than one year or thestandard operating period of the company. However, during thecompany’s current operating period, any portion of the long-termnote due that will be paid in the current period is considered acurrent portion of a note payable. The outstandingbalance note payable during the current period remains a noncurrentnote payable.

• For now, know that for some debt,including short-term or current, a formal contract might becreated.
• However, companies still need to record the cash received from their customers to reflect a true and fair position on their financial statements.
• The monthly interest rate of 0.25% is multiplied by the outstanding principal balance of $10,000 to get an interest expense of $25.
• ABC Co. receives a $10,000 advance through its bank account from a customer, XYZ Co., for future sales.
• When Sierra remits payment to the State Tax Board on October 1, the following entry occurs.
• It’s important to rely on accounting software like QuickBooks Online to keep track of your unearned revenue so that you can generate accurate and timely financial statements each accounting period.

Resources for Your Growing Business

• Sales increases (credit) for the original amount of the sale, not including sales tax.
• In terms of goods, unearned revenue occurs when the money for the goods has been paid, but the goods have not been delivered to the customer.
• As soon as the companyprovides all, or a portion, of the product or service, the value isthen recognized as earned revenue.
• For example, assume that each time a shoe store sells a $50 pair of shoes, it will charge the customer a sales tax of 8% of the sales price.

While the company got cash upfront for a job not yet done when considering deferred revenue, the company is still waiting for cash for a job it has done. For example, a contractor might use either the percentage-of-completion method or the completed contract method to recognize revenue. Under the percentage-of-completion method, the company would recognize revenue as certain milestones are met. Under the completed-contract method, the company would not recognize any profit until the entire contract, and its terms were fulfilled.

How should a company disclose unearned revenue in its financial statements?

Unearned revenue does not initially appear on a company’s income statement. As the company fulfills its obligation to provide the goods or services, the unearned revenue liability is decreased, and the revenue is recognized on the income statement. Both refer to payments received for products or services to be delivered in the future. These payments are recorded as liabilities until the goods or services are provided, at which point they are recognized as revenue.

Because it’s technically money you owe your customers

Those businesses subject to sales taxation hold the sales tax in the Sales Tax Payable account until payment is due to the governing body. Now that Sierra has provided all of the uniforms, the unearned revenue can be recognized as earned. Therefore, Unearned Uniform Revenue would decrease (debit), and Uniform Revenue would increase (credit) for the total amount. Accounts payable accounts for financial obligations owed to suppliers after purchasing products or services on credit.

• To pay your balance dueon your monthly statement would require $406 (the $400 balance dueplus the $6 interest expense).
• It is because, to recognize revenues, companies must meet two requirements.
• Those businesses subjectto sales taxation hold the sales tax in the Sales Tax Payableaccount until payment is due to the governing body.
• Unearned revenue is a liability because there is a chance of a refund.
• For example, below is a snapshot of Apple Inc.’s financial statements showing ‘deferred revenues,’ which represents money they have received for future sales.

When Sierra paid the remaining balance on August 10, the company qualified for the discount. However, since Sierra only owed a remaining balance of $11,000 and not the original $12,000, are unearned revenues current liabilities the discount received was 2% of $11,000, or $220, as demonstrated in this journal entry. Since Sierra owed $11,000 and received a discount of $220, the supplier was paid $10,780.

• This will direct the money out of the account and recognize it as revenue.
• Using journal entries, accountants document the transactions involving unearned revenue in an organized manner.
• While the company got cash upfront for a job not yet done when considering deferred revenue, the company is still waiting for cash for a job it has done.
• Many start-ups have a high cash burn rate due to spending to start the business, resulting in low cash flow.
• Next month, interest expense is computed using the new principal balance outstanding of $9,625.

That is, when incurred, the liability is measured and recorded at the current market value of the asset or service received. Some industries also have strict rules around what you’re able to do with deferred revenue. For example, most lawyers are required to deposit unearned fees into an arms-length IOLTA trust account.

For example, a bakery company may need to take out a $100,000 loan to continue business operations. Terms of the loan require equal annual principal repayments of $10,000 for the next ten years. Even though the overall $100,000 note payable is considered long term, the $10,000 required repayment during the company’s operating cycle is considered current (short term).

Unearned Revenue Journal Entries

For example, Figure 12.4 shows that $18,000 of a $100,000 note payable is scheduled to be paid within the current period (typically within one year). Each contract can stipulate different terms, whereby it’s possible that no revenue can be recorded until all of the services or products have been delivered. In other words, the payments collected from the customer would remain in deferred revenue until the customer has received what was due according to the contract. Over time, when the product or service is delivered, the deferred revenue account is debited and the money is credited to revenue. In other words, the revenue or sale is finally recognized and the money earned is no longer a liability. Unearned revenues are common in modern business, with almost all established companies taking advances for future sales.