n4 Adjusting journal entry to record the Unearned Revenue is ed out of a. Debit Unearned Revenue and Credit Service Revenue b. Debit Account Receivable and Credit Service Revenue c. Debit Service Revenue and Credit Unearned Revenue d. In this journal entry, the company recognizes the revenue during the period as well as eliminates the liability that it has recorded when it received the advance payment from the customers. In this case, the company ABC Ltd. needs to account for the $4,500 advance payment that is received from the client as the unearned revenue because it has not performed service for the client yet. Unearned revenue is a liability account which its normal balance is on the credit side. Once, the company fulfills its obligation by providing the goods or services to the customers, it can make the journal entry to transfer the unearned revenue to the revenue as below. As per the revenue recognition concept, it cannot be treated as revenue until the goods or services are provided. The amount of unearned revenue in this journal entry represents the obligation that the company has yet to perform. Unearned revenue is a liability for the recipient of the payment, so the initial entry is a debit to the cash account and a credit to the unearned revenue account. Unearned revenue usually occurs in subscription-based trading or service industries where payments are taken in advance and services are performed later. The rent received would be recognized in books as advance rent, and $1,000 would be treated as rental income each month. As a company earns the revenue, it reduces the balance in the unearned revenue account (with a debit) and increases the balance in the revenue account (with a credit). Unearned Revenue Journal Entry Revenue is only included in the income statement when it has been earned by a business. Hence, on June 29, 2020, ABC Ltd. needs to make the unearned revenue journal entry as below: In this journal entry, the $4,500 is recorded as a liability because the company ABC Ltd. has the performance obligation to provide the service to its client in the next three months. Under the liability method, a liability account is recorded when the amount is collected. The amount received would be treated as unearned revenue till the time goods are delivered. For example, on June 29, 2020, the company ABC Ltd. received an advance payment of $4,500 from its client for the three-month service that the company will perform in July, August, and September 2020. The unearned revenue account is usually … Deferred revenue means you were paid ahead of doing anything. Unearned Revenue is a liability account that registers funds a seller receives for goods or services not yet delivered to the buyer. Typical financial statement accounts with debit/credit rules and disclosure conventions CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.Return to top, IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials, * Please provide your correct email id. To move the funds to your Unearned Revenue account, you'll debit it from the A/R and credit to it, like in the screenshot below. Deferred revenue is common in businesses where customers pay a retainer to guarantee services or prepay for a subscription. At the end of the month, the owner debits unearned revenue $400 and credits revenue $400. There are two main distinctions between these two methods. These two approaches are the Liability Method and Income Method. At the end of March, since $16,000 of income are still unearned, this income will beconverted into a liability. The amount in this account will be transferred to revenue when the company fulfills its obligation by delivering goods or providing services to its customers. The following journal entries would be recorded: On 10th June, a chartered accountant received $20,000 for the filling of half-yearly returns for the year. ASU 2014-09 Topic 606 (ASC 606), Revenue from Contracts with Customers, has been called the biggest change to financial accounting standards in the last 100 years. Accounting Equation for Deferred Revenue Journal Entry The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the total equity of the business This is true at any time and applies to each transaction. Journal Entries for Unearned Revenue. As you deliver goods or perform services, parts of the deferred revenue become earned revenue. For each of parts a, b, and c. MJ-22 which its normal is! 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