Definition of Revenue Received in Advance
Under the accrual basis of accounting, revenues received in advance of being earned are reported as a liability. If they will be earned within one year, they should be listed as a current liability.
When a company receives money in advance of earning it, the accounting entry is a debit to the asset Cash for the amount received and a credit to the liability account such as Customer Advances or Unearned Revenues.
As the amount received in advance is earned, the liability account should be debited for the amount earned and a revenue account should be credited. This is done through an adjusting entry.
Examples of Revenue Received in Advance
The following are a few examples of revenue received in advance:
- An insurance company receiving premiums for protection during the following six months
- A magazine publisher receiving money from a subscriber for magazines for the following year
- A website design company receiving a client’s down payment for future work
- A law firm receiving a retainer fee from a new client
