Unearned Revenue
Payment received for goods or services not yet delivered, recorded as a liability.
Unearned revenue (deferred revenue) is cash received before the business fulfills its obligation. It's a current liability because the company owes either the promised service or a refund. As delivery occurs, unearned revenue converts to earned revenue. This is especially relevant for subscriptions, prepaid contracts, and gift card sales.
Example
A gym sells annual memberships for $600 upfront—each month, $50 moves from unearned revenue to earned revenue as the gym provides access.
Why It Matters for Your Business
Recognizing unearned revenue too early inflates income and creates tax complications, so this concept is essential for any business collecting payment before delivery.
Practical Tips
- •Set up automated monthly entries to recognize unearned revenue as it's earned.
- •Track customer prepayments separately so you always know your unfulfilled obligations.
Related Terms
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
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