Deferred Revenue: Unearned Income from Advance Prepayments

What you need to know about Deferred Revenue | Unearned Income | Prepaid Earnings

Emilie N.- FCCA, CB, MBS
Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

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Contents

What is Prepaid | Deferred | Unearned Revenue Income?

Deferred or unearned revenue income is a balance sheet liability containing advance prepayments that are yet to be earned by delivering the agreed goods or services in the future, otherwise the seller would have an obligation to repay the buyer, such as prepaid rent, insurance or subscriptions.

Deferred revenue is also interchangeably referred to as:

  • Deferred revenue, income or earnings
  • Unearned revenue, income or earnings
  • Prepaid revenue, income or earnings
  • Revenue, income or earnings from prepayments or advance payments

Journal Entries for Prepaid | Deferred | Unearned Revenue Income

Step 1: Initial Sale

The initial accounting journal entry for a prepayment is a debit to the Cash in Bank asset account and a credit to the Deferred Unearned Revenue liability account.

Unearned Deferred Revenue - Journal Entry: Initial Sale
Account Name Account Type Financial Statement Debit Credit
Cash in Bank Asset Balance Sheet $$$
Deferred Unearned Revenue Liability Balance Sheet $$$

Why are prepayments recorded as liabilities and not revenue?

Unearned Revenue is a liability because the seller owes the prepaid goods or services to the buyer until the revenue is actually earned by delivering those goods and services in the future, at which point the deferred income is recognized as revenue and reported on the seller’s income statement. 

Step 2: Revenue Recognition

The balance sheet liability of Deferred Unearned Revenue is gradually reduced with debit journal entries as the seller delivers the goods or services overt time and proportionally recognizes the Revenue on an income statement with credit journal entries.

Unearned Deferred Revenue - Journal Entry: Revenue Recognition
Account Name Account Type Financial Statement Debit Credit
Deferred Unearned Revenue Liability Balance Sheet $$$
Revenue Revenue Income Statement $$$

There are no contra-accounts involved in the standard accounting journal entries for deferred unearned revenue prepayments.

Keep reading to find out why >>>

Is Unearned Revenue a Contra Account?

Unearned revenue, also known as deferred income or prepaid earnings, is not a contra revenue account with a debit balance presented on an income statement, but rather a liability with a credit balance reported on a balance sheet.

3 Differences between Deferred Revenue and Contra Revenue

There are three main differences between deferred unearned revenue income from advance prepayments and a contra revenue account >>>

3 Differences: Deferred Unearned Revenue vs. Contra Sales Revenue
Difference Contra Sales Revenue Deferred Unearned Revenue
Debit / Credit Debit Credit
Account Type Contra Revenue Liability
Financial Statements Income Statement Balance Sheet
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Emilie N., FCCA, CB, MBS
Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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