Unearned revenue: paid before you have earned it

Money received before the work is done is a liability, because you owe the work. As the work is done, move it out of the liability and into revenue.

Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.

What it is for

A client pays 6,000 up front for three months of service. The owner sees 6,000 in the bank and calls it a good month. Two-thirds of it is still owed as work, and if the client cancels, most of it goes back.

How to think about it

On receipt: Dr Cash, Cr Unearned revenue. Divide by the months of service. At each month-end, move one share from the liability to revenue.

Worked example

Received 6,000 for 3 months: Dr Cash 6,000 / Cr Unearned revenue 6,000

Cash up, liability up. No revenue yet.

One month earned = 6,000 / 3 = 2,000

Three equal months.

Month-end: Dr Unearned revenue 2,000 / Cr Service revenue 2,000

One month of service delivered, so one share becomes revenue.

Still owed as work = 6,000 − 2,000 = 4,000

The liability that remains on the balance sheet.

Your turn

One month of a prepaid service, worth 1,500, has been delivered. Write the credit line.

Dr Unearned revenue 1,500 / Cr  1,500

The trap

Booking the deposit as revenue on the day it arrives. Revenue is earned by doing the work, not by receiving the money for it.

Practise unearned revenue on HoneA question on it now, a coding challenge where there is one, and it is remembered for review. Free, no email needed.