When researching accounting-related terms, you may come across unearned revenue. Revenue is the money that businesses generate from selling their respective goods or services. All businesses generate revenue. With that said, revenue may be considered unearned depending on whether the purchased goods or services have been delivered to the customer.
The Basics of Unearned Revenue
What is unearned revenue exactly? The term “unearned revenue” refers to revenue generated from the sale of goods or services that haven’t been delivered to the customer. A customer may pay for a product or service upfront. Construction services, for instance, often require customers to pay for at least some of the total cost upfront. Earned revenue consists of prepaid revenue such as this. Revenue is simply classified as unearned if the purchase product or service hasn’t been delivered to the customer.
Unearned vs Earned Revenue: What’s the Difference?
Unearned revenue isn’t the same as earned revenue. Also known as accrued revenue, earned revenue is revenue from the sale of goods or services that have been delivered to the customer. In comparison, unearned revenue involves the sale of goods or services that haven’t been delivered to the customer.
Some businesses only generate earned revenue. Local retail stores typically fall under this category. Most local retail stores will transfer their products to their customers at the time of the payment. When a customer pays for a product, the local retail store will exchange the product for money. As a result, local retail stores don’t generate unearned revenue; they only generate earned revenue.
Tips on Recording Unearned Revenue
If your business generates unearned revenue, you’ll need to record it. Both types of revenue need to be recorded. You can record unearned revenue in several ways. One of the easiest ways is to add a credit to one account and a debit to another account. This method is known as double-entry bookkeeping.
You can create a new account specifically for unearned revenue. Upon generating unearned revenue, add a credit for the amount of the unearned revenue to this new account. You can then add a debit to a separate cash account. With double-entry bookkeeping, recording unearned revenue is a breeze. You just need to add a credit to one account and a debit to the other account.
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