Is Reporting Unearned Revenue As Service Revenue Before It Is Earned Illegal

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Unearned revenue is money that comes into a company before it provides a service or production to a buyer. It is a liability until the visitor "earns" it by delivering its obligations. Companies are required to provide iv financial statements every quarter: the income statement, balance sheet, cash period argument and statement of shareholder'southward equity. Unearned acquirement moves through reporting statements every bit it turns from unearned to earned revenue.

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Unearned revenue is the coin a company collects before it actually provides goods and/or services that satisfy the payment for the collected funds. Unearned acquirement is reported as a electric current liability named "deferred revenue" on a visitor'south balance sail.

Unearned Revenue Overview

Unearned revenue reports the corporeality of coin a company has collected, without yet providing the goods and/or services to satisfy the obligation.

Companies that typically take large unearned revenues accounts include real estate and insurance companies. For real estate companies, rent is normally paid before the service has been provided; therefore, when a company receives rent payments, it records the rent amount every bit unearned revenues. Insurance companies meet a similar situation, because they receive insurance premiums before they provide insurance protection.

Unearned Revenue Reporting

The unearned revenue amount at the end of the time period is reported on the residue canvass equally a current liability named "deferred revenue". The cash flows from unearned revenue are recorded on the cash catamenia argument as "deferred revenue," "other greenbacks from operations" or something similar. Unearned revenue flows through the income argument, as information technology is earned by the company.

One cistron to keep in mind is to make sure the prepaid revenues are collected with cash, not with an accounts receivable. Greenbacks is preferred, as it provides more certainty that the sales are not fraudulent and the buyer is committed for the purchase of the appurtenances.

Unearned Acquirement Example

A real estate company owns one property and has one tenant. The tenant pays hire of $1,000 one calendar month alee of the service provided. At the beginning of each month, when the real estate company receives the payment, the company would tape an increment of $1,000 to unearned acquirement from lease proceeds and an increase of $ane,000 to greenbacks. The unearned revenue of $one,000 would and then turn into revenue of $i,000 at the terminate of the month.

Unearned Revenue Benefits

If the company has a high unearned acquirement from its normal operations, and so that represents a large cash flow benefit. That ways the company does not need to have the capital ahead of time to allow for the provision of services and products.

For investors, unearned revenue provides some idea of hereafter reporting revenues and earnings. If unearned acquirement is on the books, investors already have some thought of what future revenue will be. That will give them an advantage in trying to forecast futurity results.