unearned revenue

Examples of unearned revenue in the following topics:

• Unearned and Deferred Revenues

  • If the deferred item relates to revenue (cash has been received), it is carried as a liability.
  • An example of a deferred revenue is the monies received for a 12-month magazine subscription.
  • Since the seller has received full payment for all 12 issues that will be delivered over the course of the year, the payment is recorded as unearned or deferred revenue in the current liability section of the balance sheet.
  • A deferred revenue item involves cash received before the earnings process is complete.
  • Explain the purpose of classifying transactions as either deferred or unearned revenue

• Journalizing

  • You receive cash totaling $800 for classes.Cash 800 Revenue 8002.
  • The remainder is for 2-month passes allowing unlimited classes in August and September.Cash 1,500 Revenue 1,250 Unearned revenue 2502.
  • You sell inventory costing $150 for a $225.Cash 225 Revenue 225Cost of goods sold 150 Inventory 150(these can be combined into a single entry if you choose.)6.
  • The class cost $15.Revenue 15 Cash 15or Refund expense 15 Cash 158.

• Recording Transactions

  • The remainder is for 2-month passes allowing unlimited classes in August and September.Cash 1,500, Unearned Revenue 250, Service Revenue 1,250 Assets(+1,500)=Liability(+250)+Equity(+1,250)2.
  • You sell inventory costing $150 for a revenue of $225.a.
  • Cash 225, Sales Revenue 225; Assets(+)=Equity(+)b.
  • The class cost $15.Cash -15, Service Revenue -15; Assets(-)=Equity(-)8.
  • You sell inventory costing $150 for a revenue of $225.

• Overview of Lease Accounting

  • Under an operating lease, the lessor records rent revenue (credit) and a corresponding debit to either cash/rent receivable.
  • With each payment, cash is debited, the receivable is credited, and unearned (interest) income is credited.
  • Security Deposits: Nonrefundable security deposits:deferred by the lessor as unearned revenue; capitalized by the lessee as a prepaid rent expense until the lessor considers the deposit earned.

• Recognition of Revenue After Delivery

  • In this situation, revenue is not recognized at point of sale or delivery.
  • There are three methods that recognize revenue after delivery has taken place: .
  • The unearned income is deferred (recorded as a liability) and then recognized to income when cash is collected.
  • The seller records the cash deposit as a deferred revenue, which is reported as a liability on the balance sheet until the revenue is earned.
  • As the delivery of the magazines take place, a portion of revenue is recognized, and the deferred liability account is reduced for the amount of the revenue.

• Revenue

  • Revenue refers to the mechanism by which income enters a company.
  • Revenue accounts indicate revenue generated by the normal operations of a business.
  • Revenue accounts have a normal credit balance.
  • Expenses should be matched with revenue.
  • The same idea holds for revenue and incoming cash flows.

• Current Guidelines for Revenue Recognition

  • Transactions that result in the recognition of revenue include sales assets, services rendered, and revenue from the use of company assets.
  • They both determine the accounting period in which revenues and expenses are recognized.
  • Revenue is recognized due to the passage of time or as assets are used.
  • The principle allows a better evaluation of the income statement, which shows the revenues and expenses for an accounting period or how much was spent to earn the period's revenue.
  • Guidelines for revenue recognition will affect how and when revenue is reported on the income statement.

• Recognition of Revenue at Point of Sale or Delivery

  • Companies can recognize revenue at point of sale if it is also the date of delivery or if the buyer takes immediate ownership of the goods.
  • Since most sales are made using credit rather than cash, the revenue on the sale is still recognized if collection of payment is reasonably assured.
  • The revenue earned will be reported as part of sales revenue in the income statement for the current accounting period .
  • When the transfer of ownership of goods sold is not immediate and delivery of the goods is required, the shipping terms of the sale dictate when revenue is recognized.
  • A street market seller recognizes revenue when he relinquishes his merchandise to a buyer and receives payment for the item sold.

• Recognition of Revenue Prior to Delivery

  • Accrual accounting allows some revenue recognition methods that recognize revenue prior to delivery or sale of goods.
  • The accounting principle regarding revenue recognition states that revenues are recognized when they are earned (transfer of value between buyer and seller has occurred) and realized or realizable (collection is reasonably assured).
  • Revenue must be realizable.
  • Completion of production method: This method allows recognizing revenues even if no sale was made.
  • All expected revenues and costs of production related to the units produced will be reported on the income statement.

• The Importance of Timing: Revenue and Expense Recognition

  • Revenue is recognized when earned and payment is assured; expenses are recognized when incurred and the revenue associated with the expense is recognized.
  • The assets produced and sold or services rendered to generate revenue also generate related expenses.
  • Accounting standards require that companies using the accrual basis of accounting and match all expenses with their related revenues for the period, so that the income statement shows the revenues earned and expenses incurred in the correct accounting period.
  • By tying revenues and expenses to the completion of sales and other money generating tasks, the income statement will better reflect what happened in terms of what revenue and expense generating activities during the accounting period.
  • Explain how the timing of expense and revenue recognition affects the financial statements