Unearned Revenue Journal Entry

Revenue is only included in the income statement when it has been earned by a business. If the business receives payment or invoices in advance then the revenue is classified as unearned and carried as a liability on the balance sheet until the business has carried out the services or supplied the product.

For example, suppose a business provides equipment maintenance services and invoices customers 6,000 annually in advance. When the invoice is issued, no maintenance cover has been provided and therefore the revenue of 6,000 is unearned and a journal entry is required.

The unearned revenue journal entry will be as follows.

Unearned Revenue Journal Entry

The accounting records will show the following bookkeeping entries for the maintenance services invoiced in advance:

Unearned Revenue Journal Entry
Account Debit Credit
Accounts receivable 6,000
Unearned revenue account 6,000
Total 6,000 6,000

Unearned Revenue Journal Entry Bookkeeping Explained

The debit to accounts receivable reflects the amount invoiced and due from the customer under the terms of the contract.

At the date of invoicing the business has not supplied any services to the customer and the revenue is therefore unearned. The credit to the unearned revenue account is a balance sheet liability indicating that the business has an obligation to provide the customer with services.

Accounting Equation for Unearned Revenue Journal Entry

The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the total equity of the business. This is true at any time and applies to each transaction.

For this transaction the accounting equation is shown in the following table.

Unearned Revenue Journal Entry Accounting Equation
Assets = Liabilities + Owners Equity
Accounts receivable = Unearned revenue account + None
6,000 = 6,000 + 0

In this case one asset (accounts receivable) increases representing money owed by the customer, this increase is balanced by the increase in liabilities (unearned revenue account).

Unearned revenue is classified as a liability (credit) as the service still needs to be provided to the customer.

Unearned Revenue Recognition

Unearned revenue recognition will happen as soon as the service is provided.

In the above example, the maintenance contract costs 6,000 for one year, assuming the business produces monthly management accounts, each month 500 will be become recognized revenue and credited to the services revenue account in the income statement with the following journal entry

Journal Entry for Unearned Revenue Recognition
Account Debit Credit
Unearned revenue account 500
Service revenue account 500
Total 500 500

At the end of 12 months all the unearned service revenue (unearned) will have been taken to the service revenue account (earned).

A similar situation occurs if cash is received from a customer in advance of the services being provided. This is more fully explained in our revenue received in advance journal entry example.

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