What Is Unearned Revenue?

Companies record unearned revenues when they receive money for a product or service but have not yet provided or delivered it. It can be thought of as a “prepayment” for goods or services that𒅌 a person or company is expect🌺ed to supply to the purchaser at a later date.

As a result of this prepayment, the seller has a 澳洲幸运5开奖号码历史查询:liability equal to the revenue earned until the good or service is delivered. This liabilit🔯y is noted under current liabilities, as it is expected to be settled withi𒁃n a year.

Unearned revenue is also referred to as 澳洲幸运5开奖号码历史查询:deferred revenue and 澳洲幸运5开奖号码历史查询:advance payments.

Understanding Unearned Revenue

Unearned revenue is most common among companies selling subscription-based products or other services that require prepayments. Classic examples include rent payments made in advance, 澳洲幸运5开奖号码历史查询:prepaid insurance, legal reta🅷iners, airline tickets, prepayment for newspaper subscri💦ptions, and annual prepayment for the use of software.

Receiving money before a service is fulfilled can be beneficial. The early receipt of 澳洲幸运5开奖号码历史查询:cash flow can be used for any number of activities, such as paying interest on debt and purchasing more 澳洲幸运5开奖号码历史查询:inventory. 

Recording Unearned Revenue

Unearned revenue is recorded on a company’s 澳洲幸运5开奖号码历史查询:balance sheet as a liability. It is treated as a liability because the revenue has still not been earned and represents products or services owed to a customer. As the prepaid service or product is gradually delivered over time, it is recognized as revenue on the 澳洲幸运5开奖号码历史查询:income statement.

Here’s an example: If a publishing company accepts $1,200 for a one-year subscription, the amount is recorded as an increase in cash and an increase in 澳洲幸运5开奖号码历史查询:unearned revenue. Both are balance sheet accounts, so the transaction does not immediately affe𓂃ct the income statement. If it is a monthly publication, as each periodical is delivered, the liability or unearned revenue is reduced by $100﷽ ($1,200 divided by 12 months) while revenue is increased by the same amount.

Unearned revenue is usually disclosed as a 澳洲幸运5开奖号码历史查询:current liability on a company’s balance sheet. This changes if advance payments are made for services or goods due to be provided 12 months or more after the payment date. In such cases, the unearned revenue will appear as a 澳洲幸运5开奖号码历史查询:long-term liability on the balance sheet.

Unearned Revenue Reporting Requirements

There are several criteria established by the U.S. 澳洲幸运😼5开奖号码历史查询:Sec🌠urities and Exchange Commission (SEC) that a 澳洲幸运5开奖号码历史查询:public company must meet to recognize revenue. If these are not met, then 澳洲幸运5开奖号码历史查询:revenue recognition is deferred.

According to the SEC, there must be collection probability, or the ability to make a reasonable estimate of an amount for the 澳洲幸运5开奖号码历史查询:allowance for doubtful accounts, completed delivery, or ownership shifted to the buyer, persuasive evidence of an arrangement, and a determined price.

Example of Unearned Revenue

Morningstar Inc. (MORN) offers a line of products and services for the financial industry, including 澳洲幸运5开奖号码历史查询:financial advisors and 澳洲幸运5开奖号码历史查询:asset managers. Many of its products are sold through subscriptions. Under this arrangement, many subscribers pay upfront and receive the product over time. This creates a situation in which the amount is recorded as unearned revenue or, as Morningstar calls it, 澳洲幸运5开奖号码历史查询:deferred revenue.

At the end of the second quarter of 2020, Morningstar had $287 million in unearned revenue, up from $250 million from the prior-year en🅠d. The company classifies the revenue as a short-term liability, meaning it expects the amount to be paid over one year for services to be provided over the same period.

Unearned revenue can provide clues into future revenue, although investors should note the balance change could be due to a change in the business. Morningstar increased quarterly and monthly invoices but is less reli🌸ant on upfront payments from annual invoices, meaning the balance has been growing more slowly than in the past.