What is Unearned Income?
In some cases, when you receive cash (Revenue) in term of advance rent this must include in adjusting entry as an unearned income. This amount list in Liabilities or accrued income in accounting terms.
Both types of cash either under list in income or liability, as defined by two main methods. It means that it is a fund that is at disposal currently, but it cannot be utilized. As per the financial world, unearned revenue is seen as a liability.
It is not a recognized income, however, because income is only earned when it has been recognized and unearned is not earned yet. It is therefore not added to earned money, rather it is also recorded as a liability.
It is a liability because a customer is obliged to pay the intended amount and it is seen as an advance from the customer.
How is Unearned Income Adjusted Methods?
There are two methods of recording unearned income,
- The liability method
- The income method
The Liability Method:
First of all, you must understand (What is Liability?). According to the liability method, the assumed amount of unearned income is recorded into the liabilities of a firm, but credit that amounts in the journal. Consider advance payment as liability till the ending period.
For example, if the company collects $50,000 as an advance from a number of customers, then an amount of $50,000 is added to the liabilities account. Make sure you must define that period, for example, a customer paid rent in advance at 22 DEC before 31 DEC 2018 (Final Date), so till that date the amount of rent considers as Liability not earning.
A company BTECH solution (Co-Working Office) offer their customer, if they pay rent in advance of Months (March, April, May, June), they will get 20% discount. So in that case, if the customer paid that particular amount ($4000), then this amount will be unearned under liabilities. Every month the company enter this amount as a liability after deduction.
|Unearned revenue account||7,000|
The Income Method:
The total amount of the unearned income is recorded into the income account by an accountant.
If $50,000 is the unearned income and over a whole year, 10% of it is earned by the company then the adjusting amount in the income account would be $45,000.
In this case, $5000 is the service income and $45,000 is the unearned income.
Note:- In that above example ($4000) is unearned income.
in addition, the Basic student finds some difficulty in that Adjusting Entry for Unearned Revenue, understanding the unearned income and entries either under liabilities or income section. You can also contact us and ask for an extra quiz and more example of this topic.