What is Unearned Revenue? Is It an Asset or Liability?

At this point, the company’s balance sheet would carry $800 worth of unearned revenue in the revenue of $400. In short, unearned revenue is the payment a company has received for an uncompleted service. And since this good or service has yet to be earned, unearned revenue is recorded under liabilities in the balance sheet. Unearned revenue is typically classified as a current liability because the company expects to fulfill its obligations and deliver the goods or services within one year. However, if the company anticipates that it will take more than one year to fulfill its obligations, the unearned revenue should be treated as a long-term liability. A business owner can utilize unearned revenue for accounting purposes to accurately reflect the financial health of the business.

Funds in an unearned revenue account are classified as a current liability – in other words, a debt owed by a business to a customer. Once a delivery has been completed and your business has finally provided prepaid goods or services to your customer, unearned revenue can be converted into revenue on your balance sheet. 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. By understanding and properly accounting for unearned revenue, businesses can maintain accurate financial records and ensure that their financial statements reflect their true financial position. Properly managing unearned revenue is crucial for industries such as software or subscription-based services where prepayments are the norm.

Why Is Accounts Payable a Current Liability?

Unearned revenue has a direct impact on a company’s income statement as well. As the company delivers the goods or provides the services, it can recognize the corresponding revenue. This transition is crucial, as it moves the revenue from a liability to an asset – specifically, from is unearned revenue a current liability unearned revenue to earned revenue. In the context of unearned revenue, recording revenue prematurely violates this principle. Hence, accountants record unearned revenue as a liability and only recognize it as earned revenue once the company delivers the goods or services as agreed.

QuickBooks offers a wide range of financial reporting capabilities, along with expense tracking and invoice features. Here is an example of Beeker’s Mystery Box and what their balance sheet might look like. As you can see, the unearned revenue will appear on the right-hand side of the balance sheet in the current liabilities column. When revenue is recorded in the general ledger, there is a certain way to do it. This is because the revenue received ends up on the income statement, and the cash is on the balance sheet of the organization’s financial reports.

Proper Current Liabilities Reporting and Calculating Burn

Companies might try to lengthen the terms or the time required to pay off the payables to their suppliers as a way to boost their cash flow in the short term. In short, a company needs to generate enough revenue and cash in the short term to cover its current liabilities. As a result, many financial ratios use current liabilities in their calculations to determine how well or how long a company is paying them down.

Once it’s been provided to the customer, unearned revenue is recorded and then changed to normal revenue within a business’s accounting books. In accrual accounting, it is important to organize income properly, especially when it comes to prepaid services. Unearned revenue is a liability and is treated in a very unique way. A percentage of the sale is charged to the customer to cover the tax obligation (see Figure 12.5). The sales tax rate varies by state and local municipalities but can range anywhere from 1.76% to almost 10% of the gross sales price.