Financial Accounting I

study guides for every class

that actually explain what's on your next test

Unearned revenue

from class:

Financial Accounting I

Definition

Unearned revenue is a liability representing money received by a business for services not yet performed or goods not yet delivered. It is recorded on the balance sheet and reflects the company's obligation to deliver these future services or goods.

5 Must Know Facts For Your Next Test

  1. Unearned revenue is initially recorded as a liability on the balance sheet.
  2. It converts to earned revenue as the service is performed or goods are delivered.
  3. Common examples include advance payments for subscriptions, rent, and insurance.
  4. Adjusting entries are required to recognize earned revenue over time.
  5. Failure to properly account for unearned revenue can result in misstated financial statements.

Review Questions

  • Why is unearned revenue considered a liability?
  • How does unearned revenue transition to earned revenue?
  • What types of transactions typically involve unearned revenue?
© 2024 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.
Glossary
Guides