For business owners who are not familiar with accounting, one of the biggest issues they may encounter when recording business transactions is the categorisation. As an example, they may not know how to classify the assets their company owns, or they are not sure about how they should group the revenue (Also see Ways to Increase Your Business Revenue) and expenses correctly. If you are one of them, why not consider hiring an bookkeeping services in Singapore? The professionals will help you to record business transactions as well as generate financial statements without costing you much compared to the cost you need to hire a full-time in-house accountant.
In this article, we will shed light on unearned revenue (Also see Introduction to Accrued Revenue). It refers to the amount of payment that the company has received in advance for the goods and services that it will provide to the clients in the future. Unearned revenue falls under the category of liability as the company has received the payment for the work that it has not performed.
One should categorise unearned revenue as the liability of the company because the company has received the payment in advance without providing the goods or services to the party which has made the payment. According to the accrual concept of accounting (Also see Accounting principles: Accrual concept), business owners should not recognise the payment as its income until their company has provided the goods or services to the client. Hence, they need to use a different method to record the unearned revenue, instead of using the same way of how they record the earned revenue.
The payment that the company has received in advance will become the company’s liability until it delivers the goods or provides the service to the party. The advance obtained is the debt that the company owes to the customer. Thus, the unearned revenue will appear as the company’s liability on the balance sheet (Also see The Income Statement and the Balance Sheet).
As soon as the company delivers the products or services to the customer, the unearned revenue will become its revenue. At this stage, the revenue will become the company’s income and will no longer be the company’s liability. Business owners should make the corresponding adjustments in the financial statements too, which is to record the revenue as an income in the profit and loss statement.