Accounts Receivable vs Unearned Revenue Difference and Comparison

Unearned revenue represents receipt in advance but it is still a liability for a firm as now it has a legal obligation to carry out the duty that it had promised to do. It is treated as a current liability and has to be paid in the current accounting period. The two are related, yet distinct, and it is important to understand the difference between them in order to record them correctly on financial statements.

Integrating both cash accounting and accrual accounting for small businesses could lead to an increase in revenues. When the obligation is rendered, another journal entry is needed to be done to recognize revenue. Thus in case of unearned revenue, two journal entries are required to be done. On receiving advance payment, the the advantages and disadvantages of a classified balance sheet first step in the accounting process is to record any transaction via journal entries. There will be credit and complementary debit accounts as a basic fundamental in double-entry bookkeeping. Since unearned revenue is cash received, it shows as a positive number in the operating activities part of the cash flow statement.

Balance Sheet

Therefore, the accounting treatment for Unearned Revenue is such that in the case when the amount is collected from the customers, it is treated so through the following journal entry. Unearned revenue is great for a small business’s cash flow as the business now has the cash required to pay for any expenses related to the project in the future, according to Accounting Tools. Unearned Revenue refers to customer payments collected by a company before the actual delivery of the product or service. They are current assets for the firm because the firm will receive money for balancing these accounts.

If the customer has not yet been billed, record the accrued revenue as a current asset on the balance sheet, with a credit to revenue on the income statement. After customer billing for earned sales or service revenue on credit terms, reverse any entry to an accrued revenue asset account and record accounts receivable instead. For deferred revenue (unearned revenue), cash is received in advance of the product delivery or time of use, or service performance. For accrued revenue, customer invoicing and cash receipts occur after accrued revenue and sales revenue is recognized for shipping goods to the customer or performing services. As a result, the electric utility will have up to one month of expenses (cost of fuel and other operating expenses) without the related revenue being reported.

• However, since you have not yet earned the revenue, unearned revenue is shown as a liability to indicate that you still owe the client your services.
• Get deep insights into your company’s MRR, churn and other vital metrics for your SaaS business.
• As a result of this prepayment, the seller has a liability equal to the revenue earned until the good or service is delivered.
• Small businesses with deferred revenues should be aware of their balances.

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How to Interpret Accounts Receivable?

The revenue recognition principle of the accrual accounting system states that the business entity must recognize the revenue amount when it is earned and not when it is received. The principle outlines the criteria that must be met for recording an amount as revenue earned during a financial period. The key difference between unearned and accrued revenue lies in the timing of the transaction and the company’s obligation.

Definition of Unrecorded Revenue

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Unearned Revenue, as the name suggests, is revenue recorded for which work is still to be supplied. Payments to a firm or an individual are made because of an exchange of value. Accrued income is a kind of accrued revenue that applies to interest income and dividend income. Of the $1,000 sale price, we’ll assume $850 of the sale is allocated to the laptop sale, while the remaining $50 is attributable to the customer’s contractual right to future software upgrades. In all the scenarios above, the company must repay the customer for the prepayment.

Accounts Receivable vs Unearned Revenue – Difference and Comparison

This step reduces the liability on the balance sheet and reflects the company’s progress in fulfilling its obligation to the customer. Therefore, companies should carefully consider their obligations under these standards when choosing their method for reporting unearned income. The liability exists because the company has an obligation to the customer to deliver the goods or perform the services in the future.

You still don’t have cash in hand, but you’re farther along toward getting it. Once the customer pays, you’d shift $100 from accounts receivable to your cash balance. Unearned revenue is usually disclosed as a current liability on a company’s balance sheet. This changes if advance payments are made for services or goods due to be provided 12 months or more after the payment date. In such cases, the unearned revenue will appear as a long-term liability on the balance sheet.

The personal trainers enters $2000 as a debit to cash and $2000 as a credit to unearned revenue. I’m not sure exactly what your question is, but if a company has unearned revenue, they will debit cash and credit the unearned revenue liability. When the revenue is finally earned, the liability is debited and revenue (which goes through retained earnings) is credited.

It can be thought of as a “prepayment” for goods or services that a person or company is expected to supply to the purchaser at a later date. As a result of this prepayment, the seller has a liability equal to the revenue earned until the good or service is delivered. This liability is noted under current liabilities, as it is expected to be settled within a year. 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.

Over time, the revenue is recognized once the product/service is delivered (and the deferred revenue liability account declines as the revenue is recognized). Subscriptions offered, EMI and credit sales made, and assets offered on rent are examples of accounts receivables. They are disclosed at the end of the year, along with the overall financial position of a firm. If your accounts receivable keeps going up from month to month or quarter or quarter, that might mean that you’re making more and more sales on credit or that customers aren’t paying outstanding invoices. If accounts receivable goes down, that could mean that your customers are paying off outstanding invoices quickly or that they aren’t making as many purchases on credit.