How to debit and credit unearned revenue

 

How to debit and credit unearned revenues? In accounting, unearned revenues are a type of liabilities. Unearned revenues arise when a company receives cash or other assets as an advance to render services or deliver goods in the future.

 

This post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In this basic accounting level, we use the transactions of Frontier Advertising Company (FAC). As in the previous post, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

Index of how to debit and credit tutorial

• Investment by owner
• Purchase of equipment
• Unearned revenues
• Payment of rent expenses
• Insurance as prepayment and the adjusting entry
• Supplies purchase and the adjusting entry
• Withdrawal by owner
• Payment of salaries expense
• Service revenues
• What is depreciation

What is unearned revenue?

A company may receive cash as an advance from customers for delivering goods or services in the future. In practical sense, it means that the cash receipt implies the incurring of liability, an obligation to render services or deliver goods. In accounting, such an obligation is called unearned revenue. Although we say it “revenue”, the unearned revenue is considered and treated as liability.

 

How to debit and credit unearned revenue?

On January 2, FAC receives a $1,200 cash from J. Bieber. Bieber is the first client of FAC who agree to pay an advance for advertising services that are expected to be finished by March 31.

 

Basic transaction analysis

The asset of FAC in the form of $1,200 cash increases (becomes available for use), and the liability in the form of $1,200 Unearned Service Revenue is incurred. In this case, FAC incurs the liability because the advertising service has not been performed yet.

 

Accounting equation analysis

Accounting equation can be used to show the economic effects of an accounting transaction. It states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In this illustration, the effects of the cash receipt and the incurring of unearned revenue can be shown in terms of the accounting equation as follows:

 

Debit-credit analysis

According to the debit-credit rule, the increase in assets is debited. The asset of $1,200 cash becomes available in FAC. In accounting terms, the Cash account is debited $1,200.

The debit-credit rule also requires the increase in liabilities to be credited. The incurring of obligation to perform future advertising service increases a liability, an Unearned Service Revenue of $1,200 in FAC. From the accounting point of view, the Unearned Service Revenue account is credited $1,200.

 

Journal entry

In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Regularly, a batch of debit and credit amounts in the journal entries are posted to the relevant accounts in the general ledger.