Definition of Unearned Revenue
In financial accounting, unearned revenue refers to money received prior to being earned. It is also referred to as deferred revenue.
Example of Unearned Revenue
Assume that ABC Service Co. receives $24,000 on December 31, 2023 in exchange for promising to provide the client with services for the year January 1 through December 31, 2024. As of December 31, 2023 the entire $24,000 is unearned. Therefore, ABC’s balance sheet as of December 31, 2023 must report a liability such as Unearned Revenues for $24,000. During 2024 ABC must move $2,000 each month from the liability account on its balance sheet to a revenue account on its income statement.
This deferring of revenue to the periods in which it is earned will often be recorded by using the liability account Deferred Revenues. The monthly entry for $2,000 is often described as a deferral adjusting entry.
Definition of Unrecorded Revenue
Unrecorded revenue implies that the revenue has been earned, but not yet recorded in a company’s accounting records.
Example of Unrecorded Revenue
It is common for an electric utility to provide electricity to customers for up to one month before it reads the customers’ meters, calculates the bills and records the billings as revenues and accounts receivable. As a result, the electric utility will have up to one month of expenses (cost of fuel and other operating expenses) without the related revenue being reported. Therefore, at each balance sheet date, the utility must accrue for the revenues it earned but had not yet recorded. This is done through an accurual adjusting entry that debits a balance sheet receivable account and credits an income statement revenue account.
