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
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
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
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
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
* BF=Balancing figure