Discussion question - Unearned Revenue

User Generated

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Business Finance

Description

What types of industries have unearned revenue? Why is unearned revenue considered a liability? When is the unearned revenue recognized in the financial statements?

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Explanation & Answer

Companies using accrual accounting method need to adhere to revenue recognition principles proposed by Generally Accepted Accounting Principles (GAAP). The method states that companies may recognize revenue and income only in the same accounting period in which they were earned. Consequently, when companies accept deposits or advance payments, they should record them as unearned revenues. Then, in the future when the goods or services are provided to customers, they may adjust the entries as earned income.


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