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Unearned Revenues

Unearned revenues are amounts received and recorded but not yet earned such as payments received before goods are sold or service provided. Unearned revenues should be credited to the profit and loss account only in the year in which they are earned. As long as they are not earned, they remain a current liability on the balance sheet. Almost all unearned revenues of a firm are another firm's prepaid expenses.

One good example of unearned revenues is subscription. Almost all subscriptions to receive goods or services are paid in advance. To the recipients, the subscriptions are unearned revenues and become revenues only when they expire or are gradually used up by the regular deliveries of the goods or services to the subscribers.

It is important that adjusting entries be made whenever necessary to convert unearned revenues to revenues when they are recognized as earned. Otherwise, net income and profit will be understated and liabilities overstated. For example, a company is paid $3,000 on 1st Oct 20X1 for a six-month use of its warehouse. Assume its financial year end is 31st December 20X1. At the end of the first month, the earned portion of the unearned revenues should be treated as income. At year end, half of the amount remains unearned revenues. The following show the adjusting journal entries on:

(1) 31st October;
(2) 31st December before finalizing its accounts.


(1) Journal entry

Date Adjustment Folio Debit Credit



$ $
20X1



Oct 31 Unearned Revenue
500

Revenue

500

(Revenue earned in October)



Unearned Revenue Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X1



20X1


Oct 31 Revenue
500
Oct 1 Bank
3,000
" Balance c/d
2,500
















3,000



3,000














20X1







Nov 1 Balance b/d
2,500


Revenue Account

Date Particulars Folio Amount
Date Particulars Folio Amount








$





20X1







Oct 31 Unearned revenue
500


(2) Journal entry

Date Particulars Folio Debit Credit



$ $
20X1



Dec 31 Unearned Revenue
500

Revenue

500

(Revenue earned in December)



Unearned Revenue Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X1



20X1


Oct 31 Revenue
500
Jul 1 Bank
3,000
Nov 30 Revenue
500




Dec 31 Revenue
500




" Balance c/d
1,500
















3,000



3,000














20X2







Jan 1 Balance b/d
1.500


Revenue Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X1



20X1


Dec 31 Profit and Loss
1,500
Oct 31 Unearned Revenue
500





Nov 30 Unearned Revenue
500





Dec 31 Unearned Revenue
500












1,500



1,500










The Unearned Revenue Account which is a balance sheet account always has a closing balance to carry forward to the next accounting period. The Revenue Account on the hand is an income statement account, and like all income statement accounts, is closed at the end of the accounting period and starts with zero balance in the next accounting period.

Last Updated (Thursday, 07 October 2010 16:08)