Question

what's the difference between prepaid expenses and unearned revenues? I already know the definition of prepaid expenses----a company has paid cash but not yet incurred the expenses, and unearned revenues---company has received cash but not yet earned the revenues.

Also, whats the exact meaning of bold words above, please give me some examples. Thank you!

Answer 1

Answer

• Prepaid Expenses:
  >These are expenses that have been paid in Cash, BUT are not incurred for the period concerned.
  >For example: Say, Insurance premium is paid in December for 12 month for $ 12000. At the end of December, 1 month premium is expired.
  Remaining $ 11000 for 11 months will be recorded as PREPAID INSURANCE, as it hasb already been paid BUT it is not an ACTUAL EXPENSE incurred for that period (that is December).
  >Also, Expenses means the cost that has been incurred or paid to earn the revenues.
• Unearned revenues:
  >As the name suggests, ‘revenues’ that have been received in Cash BUT not earned.
  >Revenues are earned when services have been provided or Goods have been sold.
  >If payment is received before the service has been provided or Goods have been sold, it is recorded as UNEARNED REVENUE, but these cannot be considered REVENUES and taken to Income Statement.
  >Unearned revenues are recorded as Liability.
  >For example, $ 20000 Cash received in July for services to be provided in August.
• Differences:
  >Prepaid expense is an Asset account, Unearned revenue is a Liability account.
  >prepaid expense has Debit balance, Unearned revenue has Credit balance.