However, you cannot credit your revenue, or Fees Earned, account at that point because you have not yet earned the money. Instead you credit Unearned Fees, which is a liability account, to recognize that you owe the customer a certain dollar amount of service. Unearned revenue, also known as unearned income, deferred revenue, or deferred income, represents proceeds already collected but not yet earned.

• It is the end of the first month and the company needs to record an adjusting entry to recognize the insurance used during the month.
• Previously unrecorded service revenue can arise when a company provides a service but did not yet bill the client for the work.
• In this journal entry, the company recognizes the revenue during the period as well as eliminates the liability that it has recorded when it received the advance payment from the customers.
• Likewise, recording the unearned rent as revenue will result of the overstatement of revenue on the income statement and the understatement of liabilities in the balance sheet.
• Accumulated Depreciation will reduce the asset account for depreciation incurred up to that point.

The balance sheet approach for unearned revenue is presented at left below. At right is the income statement approach, wherein the initial receipt is recorded entirely to a Revenue account. Subsequent end-of-period adjusting entries reduce Revenue by the amount not yet earned and increase Unearned Revenue. Again, both approaches produce the same financial statement results.

Unearned Revenue Journal Entry

As you can see, the unearned revenue will appear on the right-hand side of the balance sheet in the current liabilities column. Unearned revenue and deferred revenue are the same things, as are deferred income and unpaid income. These are are all various ways of referring to unearned revenue in accounting. Generally, adjusting journal entries are made for accruals and deferrals, as well as estimates. Sometimes, they are also used to correct accounting mistakes or adjust the estimates that were previously made.

Once it’s been provided to the customer, unearned revenue is recorded and then changed to normal revenue within a business’s accounting books. Accumulated Depreciation is contrary to an asset account, such as Equipment. This means that https://www.bookstime.com/blog/sales-forecasting the normal balance for Accumulated Depreciation is on the credit side. It houses all depreciation expensed in current and prior periods. Accumulated Depreciation will reduce the asset account for depreciation incurred up to that point.

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At the time of purchase, such prepaid amounts represent future economic benefits that are acquired in exchange for cash payments. This means that adjustments are needed to reduce the asset account and transfer the consumption of the asset’s cost to an appropriate expense account. On January 9, the company received $4,000 from a customer for printing services to be performed. The company recorded this as a liability because it received payment without providing the service. Assume that as of January 31 some of the printing services have been provided. Since a portion of the service was provided, a change to unearned revenue should occur.

• To do so would overstate the company’s actual revenues and profits during a specific period.
• In this case, the company will have to repay the cash to the customer unless there is a revision in the contract between them to keep the contract as it is.
• Accrued expenses are expenses incurred in a period but have yet to be recorded, and no money has been paid.
• Did we continue to follow the rules of adjusting entries in these two examples?
• As soon as the asset has provided benefit to the company, the value of the asset used is transferred from the balance sheet to the income statement as an expense.
• Instead you credit Unearned Fees, which is a liability account, to recognize that you owe the customer a certain dollar amount of service.

The adjusting entry ensures that the correct amount of revenue earned appears on the income statement, not as a liability on the balance sheet. You accepted cash in advance of doing a job during the month and initially recorded it as a liability. By the end of the month you earned some of this prepaid amount, so you reduced the value of this liability adjusting entries examples to reflect what you actually earned by the end of the month. To do this, Unearned Fees was debited for the amount earned and Fees Earned was credited to increase revenue by the same amount. Any remaining balance in the Unearned Fees account is what you still owe in service in the future; it continues to be a liability until it is earned.

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When the cash is paid, an adjusting entry is made to remove the account payable that was recorded together with the accrued expense previously. FreshBooks has online accounting software for small businesses that makes it easy to generate balance sheets and view your unearned revenue. The way you record depreciation on the books depends heavily on which depreciation method you use.