Home » Accounting Explanation » Adjusting Entries


Unearned Revenue

Also referred to as received in advance revenue

Revenues or incomes which have been received by business. However, the business has not yet earned them

For example a firm received rent of building amounting to $3000 on 1st December for 3 month in advance. 31 December is the date of closing the accounting period. Therefore, only one month rent pertains to this accounting period i.e. $1000 and remaining $2000 must be treated as unearned income or revenue

Nature of unearned revenue

Since it decreases the future economic benefits of a business and creates obligation for the business to earn this revenue by providing services or products, unearned revenue is considered as a liability

Double entry for unearned revenue

DEBIT = Revenue account

CREDIT = unearned revenue account


Example

ABC Telephone Company provides telephone service. The telephone fee is receivable for every 3 months in advance

Following is the detail of telephone fee receipts by the company from a customers


Amount of Income
Income due on
Income received on

   $500
   $500
   $500
   $500
   $500

   31 March 2012
   30 June 2012
   30 September 2012
   31 December 2012
   31 March 2013


   1 January 2012
   28 March 2012
   24 June 2012
   2 October 2012
   26 December 2012


Requirement: You are required to calculate the amount income pertaining to this accounting period or the amount of income that should be charged in income statement for the year ended on 31 December, 2012

Solution:

These double or journal entries were made by the business at the time of expenses payments

1 January 2012 Company received cash $500 as the telephone fee

  DESCRIPTION DEBIT CREDIT



  Cash   $500



               Telephone income   $500




28 March 2012  ABC Company again received  telephone fee $500 at the end of another 3 months

  DESCRIPTION DEBIT CREDIT



   Cash   $500



               Telephone income   $500




24 June 2012  Another payment of $500 received by company

  DESCRIPTION DEBIT CREDIT



   Cash   $500



               Telephone income   $500




On 2 October, 2012  The customer paid telephone expenses amounting to $500 in advance

  DESCRIPTION DEBIT CREDIT



   Cash   $500



               Telephone income   $500




 At 26 December 2012, the telephone received $500 in advance as telephone fee


  DESCRIPTION DEBIT CREDIT



   Cash   $500



               Telephone income   $500




On 26 December 2012 the ABC Telephone company received $500 in advance. Since the business has not earned this income in this accounting period, the income is not related to this period and should not be recorded in the this period. Therefore, the business has made an adjusting entry for the unearned income on 31 December, 2012 which excludes this income from the "total telephone income" for current year or accounting period

The following adjusting entry was made on 31 December, 2012 to allocate income to this accounting period

  DESCRIPTION DEBIT CREDIT



   Telephone income   $500



               Unearned telephone income   $500




Now you just have to post the above journal entries in the  telephone fee income account to find out the "Total  telephone fee income" for this accounting period




DEBIT
Telephone income A/C*



CREDIT
DATE
DESCRIPTION
AMOUNT
DATE
DESCRIPTION
AMOUNT
Dec. 31
Dec. 31
Unearned income
Income statement (BF)
$500
$2000
Jan. 1
Mar. 28
Jun. 24
Oct. 2
Dec. 26
Cash
Cash
Cash
Cash
Cash
$500
$500
$500
$500
$500

TOTAL $2500
TOTAL $2500

$2000 is "Total amount of income" that should be charged to this accounting. This income will be shown in income statement or profit and loss account

*A/C=Account
* BF=Balancing figure