Unearned Revenue

Customer paying upfront

Unearned Revenue is utilized in situations where customers pay upfront for a service that we'll provide to them at a later date.

Scenario: On March 1st, a customer pays upfront to rent out your warehouse for 3 months. Each month of rent costs $1,000.

The blue underlined text signals...

  • A customer pays upfront to rent out your warehouse. ➡️ We'll be working with Unearned Revenue.
  • That customer is paying us right now. ➡️ We'll represent this through Cash.

Months of Rent = 3
Rent per month = $1,000

Upfront Payment = 3 x $1,000
Upfront Payment = $3,000

TransactionDebitCredit
??????
     Unearned Revenue$3,000

The reason is...

  • We now owe (+) our customer for 3 months of rent (that they paid for upfront) and are liable to provide that to them.
  • This is represented through Unearned Revenue.
  • Which is a liability account, and therefore has a normal credit balance.
  • So, to increase it by $3,000, we'll credit it.
TransactionDebitCredit
Cash$3,000
     Unearned Revenue$3,000

The reason is...

  • We have obtained (+) cash upfront from the customer for 3 months of rent.
  • This is represented through Cash.
  • Which is an asset account, and therefore has a normal debit balance.
  • So, to increase it by $3,000, we'll debit it.

Adjusting entry

Scenario: Write the adjusting entry on March 31st for rent revenue accrued.

The blue underlined text signals...

  • We're writing an adjusting entry on March 31st ➡️ We'll be pulling out of Unearned Revenue.
  • This adjusting entry will be recording rent revenue. ➡️ We'll be working with Rent Revenue.

Above, we were given that each month of rent costs $1,000.

Rent = $1,000

TransactionDebitCredit
Unearned Revenue$1,000
     ??????

The reason is...

  • We have "earned" (-) one month worth of revenue that the customer paid upfront for.
  • This was stored in Unearned Revenue.
  • Which is a liability account, and therefore has a normal credit balance.
  • So, to decrease it by $1,000, we'll debit it.
TransactionDebitCredit
Unearned Revenue$1,000
     Rent Revenue$1,000

The reason is...

  • We have officially gained (+) revenue from our customer for one month of rent.
  • This is represented by Rent Revenue.
  • Which is a revenue account, and therefore has a normal credit balance.
  • So, to increase Rent Revenue by $1,000, we'll credit it.

ACCRUAL BASIS REMINDER: Even though we received payment upfront from the customer for this rent... it wasn't officially earned until after the first month. That's why we're recording the first month's rent revenue right now, to follow accrual basis accounting.

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