Explaining Unearned Revenues

Unearned revenue can be defined as the cash piles that are generated due to several business transactions however is are not actually earned by the business. For example advance payments of the services and products that are promised to the customers by the business but are not provided yet. The cash that is accumulated in the company’s account in advance before providing the services or goods is called unearned revenue.

Unearned revenues are considered to be short term liabilities as company has to provide customer with the goods or services they had paid for otherwise the company has to refund the money. Almost all the accountants treat the unearned revenue as a liability to be paid until the cash is actually earned by providing customers with products or services. One of the best examples of unearned revenue is a lease contract where the tenant has to pay money or rent in advance and the rent earned is a kind of unearned revenue for the owner of the leased property. Another example of unearned revenue is cash earned by the business while a customer purchases online as cash is collected in advance in case of online shopping and goods are delivered later to the customers.

The unearned revenues are calculated for a journal entry by adding all the payments of advance cash received by the customers. Until the services or products are delivered to the customers this entry is treated as liability. A business maintains the deferred revenue account of every customer and revenue is shown as a balance of that account which is debited from the account when the services or goods are delivered to the customers.