unearned revenues acc 291

Unearned revenues are revenues that are received before the company delivers goods or provides services. Some industries that have unearned revenues would include magazine publishers as they only receive checks from customers once the magazine is ordered. Until then the company awaits payment and does not have this in advance. Another company would be airlines because they receive cash once the tickets are sold for future flights. Unearned revenue is used by any company that accepts payments or deposits in advance for the company’s services or products that the company will deliver to the consumer in the future. An example would include professional service providers similar to accounting, legal and contracting firms that accept deposits should record these deposits as unearned revenue as well. On the contrary, once the services and products are complete the company should properly adjust the previous entry of unearned revenue and report the deposit or payment as earned revenue.

According to the text unearned revenue is a liability because although the customer purchased the item technically the item has not been claimed. There are many things that can go wrong and the company may end up not gaining the revenue. Unearned revenue is classified as a liability because it is entered as a debit to the cash account and a credit to the unearned revenue account. When companies do not deal with unearned revenue in this type of way, and do not recognize it all at once, the revenue and profit would become overstated, and then understated for the additional periods in which the revenue and profit were suppose to be recognized. This also causes conflict in the matching principle, revenues are being recognized all at once, while expenses are not being recognized until the later periods.

Unearned revenue is initially placed on the balance sheet as a liability, once the product or services are complete then the company will place the charges on the balance sheet as earned