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Unearned revenue is a liability, despite the word "revenue" in its name. It represents a customer payment received before the company provides the promised goods or services. It is also called a customer advance or deferred revenue.
Alder Services receives $9,000 for three distinct services priced at $3,000 each. None has been provided. Assume revenue is recognized as each service is completed and accepted.
Record the advance
Cash increased, but Alder still owes all three services. The receipt is not yet earned Service Revenue.
Record the completed service
After one service is completed and accepted:
The remaining liability is $9,000 - $3,000 = $6,000 for the two services still owed. The adjustment contains no Cash because the receipt was recorded earlier.
The equal amounts follow the supplied service prices and recognition assumptions. Time passing or retaining the cash does not always establish earned revenue. A refund would reduce the liability and Cash without creating revenue. More complex contracts need their own recognition analysis.
Connect the introductory account to contract liability
For a qualifying customer contract, this receipt-before-performance balance is a contract liability. That concept also covers an unconditional amount due before performance, even when cash has not arrived. The present example begins with cash received so that the basic deferral entry can be studied on its own.
Read ASC 606-10-45-2 on FASB for consideration received or due before transfer. A payment label alone cannot settle recognition: inspect the remaining obligation and the applicable guidance.
Check the adjustment
Alder has recorded the advance. It spends some of the cash on wages before providing another service. Does that payment reduce Unearned Service Revenue?
No. The wage payment does not itself establish performance of the customer service. The liability changes when the relevant obligation is satisfied, refunded, or otherwise changed under the supported contract facts.
The prepayment and customer advance example includes this type of adjustment in a complete trial balance. It uses Northline as a separate fictional company. The contract-liability practice extends the reasoning to payment due before cash collection.
Put the concept to work
Understand this concept
- Explain why a qualifying customer receipt before performance initially creates a liability and how later performance creates revenue.
Apply this concept
- Prepare and explain a basic unearned-revenue adjustment that separates current-period performance from the remaining customer obligation.
Learning resources
Choose a lesson, try an application, or inspect the sources behind this concept.
Build on these ideas
- Adjusting entry — Apply
To apply this concept: Required. Period-end performance is transferred from the existing liability through a supported adjusting entry.
- Deferral — Understand
To understand this concept: Required. The receipt-before-performance sequence is the liability side of a deferral.
- Liability — Apply
To understand this concept: Required. The unperformed or refundable portion must represent a present obligation under the stated facts.
Show 2 more prerequisites
- Revenue — Understand
To understand this concept: Required. Revenue follows qualifying performance rather than the direction of Cash.
- Unearned revenue — Understand
To apply this concept: Required. The adjustment depends on distinguishing the performed and unperformed portions.
Lessons
Worked examples and cases
Practice
Common mistaken ideas
Sources
Related concepts
Use this idea next
- Contract liability — Understand
Required level here: understand. Required. The foundational deferral establishes cash-before-performance liability logic.
- Unearned revenue — Apply
Required level here: understand. Required. The adjustment depends on distinguishing the performed and unperformed portions.
Used in these readings
These chapters explain or apply this concept. The label states how the chapter uses it.