Unearned Revenue

What Is Unearned Revenue?

Unearned revenue is money received by an individual or company for a service or product that still can't seem to be given or delivered. It very well may be considered a "prepayment" for goods or services that a person or company is expected to supply to the purchaser sometime in the not too distant future. Because of this prepayment, the seller has a liability equivalent to the revenue earned until the great or service is delivered. This liability is noted under current liabilities, as being settled in the span of a year is expected.

Unearned revenue is likewise alluded to as deferred revenue and advance payments.

Grasping Unearned Revenue

Unearned revenue is generally common among companies selling subscription-based products or different services that require prepayments. Classic models incorporate rent payments made in advance, prepaid insurance, legal retainers, airline tickets, prepayment for paper subscriptions, and annual prepayment for the utilization of software.

Getting money before a service is satisfied can be beneficial. The early receipt of cash flow can be utilized for quite a few activities, for example, paying interest on debt and purchasing more inventory.

Recording Unearned Revenue

Unearned revenue is recorded on a company's balance sheet as a liability. It is treated as a liability on the grounds that the revenue has still not been earned and addresses products or services owed to a customer. As the prepaid service or product is steadily delivered over the long haul, it is recognized as revenue on the income statement.

On the off chance that a distributing company acknowledges $1,200 for a one-year subscription, the amount is recorded as an increase in cash and an increase in unearned revenue. Both are balance sheet accounts, so the transaction doesn't promptly influence the income statement. On the off chance that it is a month to month publication, as every periodical is delivered, the liability or unearned revenue is diminished by $100 ($1,200 partitioned by 12 months) while revenue is increased by a similar amount.

Unearned revenue is normally unveiled as a current liability on a company's balance sheet. This changes assuming that advance payments are made for services or goods due to be given 12 months or more after the payment date. In such cases, the unearned revenue will show up as a long-term liability on the balance sheet.

Unearned Revenue Reporting Requirements

There are several criteria laid out by the U.S. Securities and Exchange Commission (SEC) that a public company must meet to perceive revenue. Assuming these are not met, revenue recognition is deferred.

As per the SEC, there must be assortment probability, or the ability to make a reasonable estimate of an amount for the allowance for doubtful accounts, completed delivery, or ownership moved to the buyer, influential evidence of an arrangement, and a determined price.

Illustration of Unearned Revenue

Morningstar Inc. (MORN) offers a line of products and services for the financial industry, including financial advisors and asset managers. A significant number of its products are sold through subscriptions. Under this arrangement, numerous supporters pay upfront and receive the product over the long haul. This causes a situation where the amount is recorded as unearned revenue or, as Morningstar calls it, deferred revenue.

Toward the finish of the second quarter of 2020, Morningstar had $287 million in unearned revenue, up from $250 million from the earlier year end. The company groups the revenue as a transient liability, meaning it anticipates that the amount should be paid more than one year for services to be given over a similar period.

Unearned revenue can give signs into future revenue, in spite of the fact that investors ought to note the balance change could be due to a change in the business. Morningstar increased quarterly and month to month invoices yet is less dependent on up-front payments from annual solicitations, meaning the balance has been developing more leisurely than in the past.

Features

• It is recorded on a company's balance sheet as a liability since it addresses a debt owed to the customer.
• When the product or service is delivered, unearned revenue becomes revenue on the income statement.
• Getting funds early is beneficial to a company as it increases its cash flow that can be utilized for an assortment of business capabilities.
• Unearned revenue is money received by an individual or company for a service or product that still can't seem to be given or delivered.