Question

What are unearned revenues? Illustrate their treatment in accounting with examples.

Answer 1

Answer:

UNEARNED REVENUES:

Unearned renueues ( also known as  deferred revenue or advance payments) basically refers to the money that has been received but service or goods against which are yet to be delivered. They are essentially "prepayment" for any goods or service that a person/company/organisation is expected to provide against that prepayment in future. As such it is represented as a libility in the books of the seller as liability till such delivery is actually made and recored as an asset in the books of buyer.

Examples of unearned revenues include prepaid insurance premium, rent payments made in advance, fees of retainers, airline/train/bus tickets, prepayment for magazine/newspaper subscriptions, prrepayment for use of softwares etc.

Treatment in books of accounts:

Unearned revenues are recorded in balance sheet as a liability (generally current liability) in the books of seller and are recored as an asset (generally current asset) in the books of the buyer. Because these revenues have not been earned on the part of the seller and expenses have been made in advance on the part of the buyer. When actaul exchange of goods or service takes place these assets or liabilities are removed from balance sheet and taken to income statement as income in case of seller and expense in case of buyer.

Let us take an example for the same:

Let us assume that M/s XYZ Ltd paid $250 to M/s PQR (M/s PQR being a firm engaged in the business of distribution of fashion magazines)  as subscription for delivering weekly fashion magazines from next month for an year. In such a case:

M/s XYZ Ltd will record the entry in its books as follows:

Prepaid Magazine Subscription A/c----Dr. $250

To Cash A/c $250

(Being Payment for magazine subscription)

and M/s PQR will record the entry as follows:

Cash A/c--------Dr $250

To Advance Subscrition Received $250

(Being Subscription received in advance)

After the actual delivery of goods, both XYZ LTD and PQR will reverse the respective asset and liability account and take them to imcome statement.

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