Bookkeepers and accountants make adjusting entries to recognize the delivery of unearned revenue.
Delayed revenue is an accounting method that recognizes sales revenue once the company renders the associated goods or services. Companies may prepay for certain products, such as insurance, which the carrier records as unearned revenue according to accrual accounting principles. The airline industry operates under the concept of delayed revenue. Airlines typically collect payments for airfare before they deliver the purchased services. Magazine and newspaper subscriptions are another example of services that utilize the delayed revenue concept.
Payment Recognition
When a company receives payment for goods and services that it has yet to deliver, it records two transactions. The company's accountants will record an increase in cash for the payment amount. This transaction increases the company's total assets. Accountants record another transaction under unearned revenue for the amount of the payment. Unearned revenue is a liability account, meaning that the company still owes the services or goods. Recording the same amount under both cash and unearned revenue ensures that the company balances its assets and liabilities.
Delivery Recognition
Once a company delivers the goods or services, it needs to recognize the revenue. Upon recognition, the company records a separate set of accounting transactions. The first accounting entry involves decreasing unearned revenue for the amount of delivered goods. A second entry credits a revenue account that describes the type of revenue. For example, a magazine that sells subscriptions would record the second entry under "subscription revenue." A property management company might record it under "rent revenue."
Accuracy
The company recognizes revenue when it actually delivers the goods and services since it may need to refund customer payments. Cancellations are always a possibility, particularly with the purchase of services such as airline tickets, cable television subscriptions and prepaid legal services. Goods that consumers order for delivery may become lost or sustain damages while in transit. Delaying the recording of revenue ensures that the company does not overstate sales for a particular period.
Timing
It is possible for a company to receive payment for goods or services in one accounting period and not be able to recognize the revenue until the next period. A company's income statement will reflect only the income it recognizes within one accounting period. Potential investors use the income statement to determine if the company generates enough sales revenue to cover its expenses. Under the delayed revenue concept, readers of the company's financial statements do not see the amount of expected or unearned revenues.
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