Unearned revenue is a current liability account that represents money collected from customers before goods have been delivered or services have been performed.
When a company receives payment from customers for goods or services not yet delivered, the company will initially record the payment on the balance sheet as a current liability. The payment is classified as a liability because the company has an obligation to deliver the goods or services in the future. The company will recognize the revenue as goods are delivered or services provided.
Unearned revenue is common for businesses that sell subscriptions and memberships. Unearned revenue is also common for businesses that provide service contracts.
For example, suppose a company sells a one-year subscription to a customer for $500. The customer pays for the entire year in a lump sum. The initial journal entry for the company is to debit cash and credit unearned revenue. At the end of each month, the company will have delivered one-twelfth of its obligation to the customer. The company will thus recognize $41.67 dollars in revenue each month by debiting unearned revenue and crediting sales. At the end of the year, the company will have fulfilled its obligation and will recognize the entire $500.
