Unearned revenue is the amount received without performing the services or delivering the goods. Unearned revenue is when your company receives cash before being able to recognize revenue, so you recognize a liability. The reason unearned revenue is a liability is the document that the company has an obligation to fulfill before the company can recognize the payment it received as revenue.
The revenue is recognized when the company provides goods or services. An example of an industry that has unearned revenue Is the Airline industry where costumers pay months ahead of time before the company fulfills its services by transporting that passenger.
Example 1:
On December 31, 2017, all the following transaction occurred for Luca, Inc. ("LI"). Barry, Inc. gives LI $9,000 as an advance for inventory to be delivered in January 2019. Record journal entry reflecting the above transaction for LI?
Journal Entry 12/31/17
Debit Credit
Cash $9,000
Unearned Revenue $9,000
To record cash received in advance
This will increase cash because it is an asset with a normal debit balance and increase unearned revenue because it is a liability account with a normal credit balance. These $9,000 unearned revenue balances will be on LI’s balance sheet until they deliver the inventory in January 2019. When January 2019 comes, and we deliver the inventory we do the following:
Journal Entry 1/1/19
Debit Credit
Unearned Revenue $9,000
Revenue $9,000
To record revenue
This will reduce our unearned revenue account to zero and It will increase our revenue by $9,000.
Example 2:
On October 1, 2018, YYZ University sold 2,000 tickets to its 20 baseball games for $150 each. On December 31, YYX University has played 10 of its regular games, winning 2 and losing 8. YYZ University makes the following entry:
Step 1: Journal Entry 10/1/18
Debit Credit
Cash $300,000
Unearned Revenue $300,000
Baseball revenue received in advance
YYZ University has played half of its home baseball games and now can recognize 10-games of Revenue. Note that the number of wins and losses does not matter since YYZ University's Revenue depends on the games played and not the outcome of the game.
Step 2: We do the following calculation to determine the revenue generated:
10 games played
10 games/ 20 games * $300,000 (Unearned Revenue ) = $50,000 Earned Revenue for the month ending December 31, 2018. The journal entry is as follows:
Step 3: Journal Entry 12/31/18
Debit Credit
Unearned Revenue $50,000
Revenue $50,000
To recognize 10-games of revenue
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