For now, know that for some debt,including short-term or current, a How to Invoice as a Freelancer formal contract might becreated. This contract provides additional legal protection for thelender in the event of failure by the borrower to make timelypayments. Also, the contract often provides an opportunity for thelender to actually sell the rights in the contract to anotherparty.

How Is Unearned Revenue Different from Accounts Receivable?

If the delivery date is extended beyond 12 months after the transfer of the revenue, then it will be recorded under long-term liability. When a business sells a gift card, it receives cash, but the obligation to provide goods or services only arises when the card is redeemed by the customer. Similarly, retainer fees paid to legal or consulting firms before services are rendered also fall into this category. Advance payments for future services, like airline tickets purchased months before a flight or rent collected for a future period, are also classic instances.

Service Providers

At the end every accounting unearned revenues are classified as liabilities. period, unearned revenues must be checked and adjusted if necessary. The adjusting entry for unearned revenue depends upon the journal entry made when it was initially recorded. And so, unearned revenue should not be included as income yet; rather, it is recorded as a liability. This liability represents an obligation of the company to render services or deliver goods in the future. It will be recognized as income only when the goods or services have been delivered or rendered.

Step 2: Recognize revenue over time as obligations are fulfilled

This occurs when customers prepay for a product or service, resulting in the company holding the funds as a liability on their balance sheet until the goods or services are delivered or rendered. Unearned revenue is an essential concept in accounting, as it impacts the financial statements of businesses that deal with prepayments, subscriptions, or other advances from customers. Unearned revenue is recorded at the time of payment and then adjusted over time. For long-term contracts, businesses recognize portions of revenue periodically, ensuring that financial statements reflect actual earnings. Subscription-based businesses, service providers, and companies handling pre-orders update their unearned revenue https://houseofenglish.edu.eg/the-accounting-equation-how-assets-liabilities-and/ accounts monthly, quarterly, or as obligations are met. Subsequently, as the business delivers the goods or performs the services, it recognizes a portion of the unearned revenue as earned revenue.

Unearned revenue vs. deferred revenue

An increase in unearned revenue can lower this ratio, potentially signaling weaker short-term liquidity. For instance, a company with $500,000 in current assets and $300,000 in current liabilities, including $100,000 of unearned revenue, has a current ratio of 1.67. While this may raise concerns, unearned revenue represents obligations tied to future revenue streams rather than immediate cash outflows.