What you need to know about Deferred Revenue | Unearned Income | Prepaid Earnings
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:
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 | $$$ | |
| Deferred Unearned Revenue | Liability | Balance Sheet | $$$ | |
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.
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 >>>
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.
Find out more about contra revenue accounts like Sales Returns, Discounts and Allowances
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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