An amount of unearned, or deferred, revenue is the value of products or services that a company owes to a customer who has already paid for the services. When a customer pays for products or services upfront, such as for an annual magazine subscription, you must initially report the amount as a liability, which is money a company owes to another party. You adjust your accounting records as you provide the product or service to balance the unearned revenue. This reduces the liability and transfers the amount to your earned revenue account.
Instructions
1. Determine the amount of upfront money you received from a customer to provide your products or services, and determine the number of months for which you will provide the service. For example, assume you received $360 upfront for a 12-month newsletter subscription.
2. Increase your cash account in your accounting journal by the amount of the upfront payment. Increase your unearned revenue account by the same amount in the same journal entry. In this example, increase both your cash account and unearned revenue account by $360.
3. Divide the money you received by the number of months of service for which the customer paid to calculate the revenue you earn per month by providing the service. In this example, divide $360 by 12 months to get $30 per month.
4. Decrease your unearned revenue account at the end of each month by the amount of revenue you earn per month from providing the service to the customer. Increase your earned revenue account by the same amount in the same journal entry. This balances the unearned revenue by reducing your liability to the customer and recording the revenue you've earned. Do this at the end of each month until you have completed the service for the customer. In the example, decrease your unearned revenue account by $30, and increase your earned revenue account by the same amount at the end of each month for 12 months until you have earned the entire $360.
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