{"id":156,"date":"2018-04-16T20:55:01","date_gmt":"2018-04-16T20:55:01","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&p=156"},"modified":"2024-04-26T22:19:00","modified_gmt":"2024-04-26T22:19:00","slug":"reporting-unearned-revenue","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/reporting-unearned-revenue\/","title":{"raw":"Reporting Unearned Revenue","rendered":"Reporting Unearned Revenue"},"content":{"raw":"
\r\n

Learning Outcomes<\/h3>\r\nDiscuss how unearned revenues are reported on the balance sheet\r\n\r\n<\/div>\r\nUnearned revenue is money received by a or company for a service or product that has yet to be fulfilled. Unearned revenue can be thought of as a \"prepayment\" for goods or services that a person or company is expected to produce for the purchaser at some later date or time. As a result of this prepayment, the seller has a liability equal to the revenue earned until delivery of the good or service.\r\n\r\nFor example, you pay $1200 for a one-year membership at a local gym on January 1. Your payment of the entire years\u2019 membership creates a liability for the gym until you \u201cuse up\u201d some of your pre-paid membership. The transaction would be recorded as an increase to cash (debit) and an increase to unearned revenue (liability). These are both Balance Sheet accounts!\r\n\r\nEvery month the gym will make an entry to recognize the revenue from your membership. This will be a decrease in unearned revenue (liability) and increase in earned revenue (income). They will continue to recognize the $100 every month until you have \u201cused up\u201d your pre-paid membership.\r\n\r\nWhy then does your pre-paid membership create a liability for the company? If the gym burned down in May and you could no longer go to the gym, the company would be \u201cliable\u201d to you for the remaining 7 months of membership dues that you paid for but did not get to use. They would have to refund you $700\u2014thus a liability is created.\r\n\r\nThis recognition of revenues when they are earned is at the heart of accrual accounting and the \u201cmatching principle.\u201d\r\n
\r\n

practice questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/1941ad47-757f-41b8-a253-32fd4a997c02\r\n<\/div>","rendered":"
\n

Learning Outcomes<\/h3>\n

Discuss how unearned revenues are reported on the balance sheet<\/p>\n<\/div>\n

Unearned revenue is money received by a or company for a service or product that has yet to be fulfilled. Unearned revenue can be thought of as a “prepayment” for goods or services that a person or company is expected to produce for the purchaser at some later date or time. As a result of this prepayment, the seller has a liability equal to the revenue earned until delivery of the good or service.<\/p>\n

For example, you pay $1200 for a one-year membership at a local gym on January 1. Your payment of the entire years\u2019 membership creates a liability for the gym until you \u201cuse up\u201d some of your pre-paid membership. The transaction would be recorded as an increase to cash (debit) and an increase to unearned revenue (liability). These are both Balance Sheet accounts!<\/p>\n

Every month the gym will make an entry to recognize the revenue from your membership. This will be a decrease in unearned revenue (liability) and increase in earned revenue (income). They will continue to recognize the $100 every month until you have \u201cused up\u201d your pre-paid membership.<\/p>\n

Why then does your pre-paid membership create a liability for the company? If the gym burned down in May and you could no longer go to the gym, the company would be \u201cliable\u201d to you for the remaining 7 months of membership dues that you paid for but did not get to use. They would have to refund you $700\u2014thus a liability is created.<\/p>\n

This recognition of revenues when they are earned is at the heart of accrual accounting and the \u201cmatching principle.\u201d<\/p>\n

\n

practice questions<\/h3>\n

\t