What type of account is unearned revenue?

Answer

Unearned revenue is usually included in a deferred revenue account for tax-recording purposes. Unearned revenue is revenue for services not yet rendered or goods that have not been distributed to the customer, according to Business Economics. Examples of unearned revenue include prepayment for airline tickets, transportation vouchers and concert tickets. When the ticket is redeemed or paid-for merchandise is shipped, the monies move from an unearned revenue account to sales.

According to AccountingTools, unearned revenue accounts can be used to estimate the amount of income that a company expects to receive in a certain period. These types of revenue can come from anticipated sales, rental payments made in advance and prepaid insurance. Unearned revenue may also be denoted as prepaid revenue on a company's balance sheet.

AccountingTools notes that unearned revenue accounts are liabilities rather than assets because the company is liable for the amount until the service is redeemed or the product is distributed. For accounting purposes, unearned income is debited from a cash account and credited to the unearned revenue account. Unearned revenue accounts should be reported as liabilities on the balance sheet to prevent the possibility of overstating revenue or income.

Business Economics notes that some prepaid transactions, such as placing a deposit on a rental property, are considered prepayment for potential services and are not classified as unearned income, because the contractual obligations regarding the exchange of money for services is different from a sales transaction.

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