Unearned revenue is amount of money that is received by the business for goods and services that is yet to be delivered or rendered. Unearned revenue can also be interpreted as revenue received in advance from customers but the performance of service or delivery of goods would be done later on.
Hence, the business creates the liability in its balance sheet till goods or services are delivered or performed. Popularly, unearned revenues are also known as deferred revenue or advance payments.
Some business models regularly thrive on the basis of unearned revenue. These are businesses selling subscription-based products and which would require advance payments. Popular examples include, rent payments are made in advance, prepaid insurance, airline tickets payments, newspaper subscriptions and payments for the use of software.
Receiving money in advance is very beneficial for the business to thrive. The revenue received early can be used in various ways like prepayment of debt or making requisitions of more inventory.
Recognition of unearned revenue
Unearned revenues provide various clues into how the company would be able to generate revenue in the coming quarters of reporting. The figure of unearned revenue becomes great importance to investors. Netflix is based on subscription model. The coronavirus although resulted in spurge of demand for Netflix.
Not every business has been spared. Take for example football sports club. They usually allow for annual subscription to fans to watch all the games. Manchester United for example would have to refund all the yearly fees it received from football fans for annual ticket membership fees.
This is meant to say things can go both ways in case of unearned revenue. The business may have to refund the unearned revenue in case of adverse circumstances.
There are three ways to record revenue. In case of accrual revenue, revenues are recognized at the time of performance of work. This is the general approach to record revenue and is in line with accounting principles. In case of deferred revenue, which equates to unearned revenue, the cash is received before the revenue has to be recognized as per accrual system of book keeping. T
his approach considers unearned revenue as a liability until the goods or services are delivered or rendered as the case may and then the revenue shall be identified. Another common transaction is when the business receives cash at the same time the goods or services are provided. In that case, revenue will be recorded impromptu.
How Unearned Revenue is Reported?
Unearned revenue is promised service that has not been performed. Hence, such revenue which is technically not a revenue has to be reported. There are two methods to report unearned revenue. These are liability method and income method.
In case of liability method, the unearned revenue is considered as liability. The appropriate reason for this would be that company has not performed the service and hence, the work seems to be pending even though the cash seems to have been received.
Hence, the unearned revenue has to be reported as a liability. At the end of March, the company will make adjusting entry which looks as
Unearned Revenue and How It Is Accounted for in Business
The journal entries would look as :
(To record cash received in advance from customer)
(To record revenue for the services performed)
The same payment of unearned revenue would be treated differently if the company uses income method. The income method approaches towards the unearned revenue as advanced payment as income. The general trade practice is however liability method.
Unearned Revenue in Balance Sheet
The customers do advance payments for the services they expect to be performed within a few months or a year at stretch. Hence, unearned revenue would be recorded under short term liabilities alongside trade payables. This would be reported under the Liabilities side of Balance sheet. Let’s take a short example.
Sinra Inc has received internet subscription for 3-month package from 200 customers at $ 30 dollar per customer per month in the first week of April for April to June package.
Now, in the first week, Sinra Inc has to recognize all of 200 customers as unearned revenue. This would be 200*30*3 = $ 18000
If the balance sheet is made at the end of April month i.e. at April 30, it would look as the following :
Other current liabilities are type of categorization of liabilities. These are residual current liabilities that have not been specified by the company or regulations or do not meet the criteria of being classified separately.
They are referred to as they are uncommon and insignificant like the major accounts of current liabilities as trade payables, accounts payable, income taxes payable. Other current liabilities are listed under the liabilities side of a firm’s balance sheet.
Other current liabilities are characterized as uncommon or insignificant. Other current liabilities are rarely recorded in the financial statements, hence, the net balance in other current liabilities account is typically small.
Understanding Other current liabilities (OCL)
Depending on the industry and industry practices, the explanations on other current liabilities can be found on the quarterly and annual filings by the company. To simplify miscellaneous current liabilities of the big companies, the term “other current liabilities” has been established to represent all the small items of current liabilities.
The major components of liabilities are either long term liabilities or current liabilities. Long term liabilities are non-current liabilities such as bank loans, debentures and long term notes payable. These liabilities have a span of more than 1 year and are payable in more than 1 year.
On the other hand, current liabilities are short term liabilities which have to be paid within 12 months. They are the liabilities that can be easily paid with liquidating current assets in the process of daily operations. Current liabilities include trade payables, accounts payable, income taxes payable.
Current liabilities that are not specified or uncommon won’t be categorized under current liabilities. Instead, they will be thrown into the residual heading of other current liabilities. Instead, these liabilities will be taken to a generic “other” category and would be recognized as other current liabilities (OCL) on the balance sheet.
Examples of other current liabilities shall include:
advances from customers
unpaid services and materials for previously invoiced projects
Special Considerations in case of other current liabilities
For publicly listed companies, they have to give clear breakdown of other current liabilities in their quarterly and annual filings. However, they represent no so significant amount of money. Hence, the companies may choose to ignore showing other current liabilities separately.
However, OCL would be placed under footnotes to financial statements. Rarely explanations are needed for OCL.
However, when needed, the company shall offer the explanations in notes to accounts. Other current liabilities are generally assumed to be disposed of within an accounting cycle that would be 12 months.
The nature of each OCL needs to be determined. It is important for the management to know about the liquidity of OCL.
If accounts in other current liabilities in the past year become material in the current year, it may need to be disclosed into major defined current liabilities accounts. This would slowly create insightful information in the minds of investors.
The simple calculation for OCL would be by subtracting from current liabilities, the current asset accounts as cash & cash equivalents, accounts receivable, marketable securities, inventory, and prepaid expenses.
it is represented as,
OCL = Total Current Liabilities – Accounts Payable – Short term debt – Income taxes payable – current maturities of long-term debt
Let’s take the example of Sinra Ltd that had recently filed its annual financial statements. The following details about current liabilities were available
Accounts Payable – $ 100,000
Short term debt – $ 200,000
Income taxes payable – $ 30,000
current maturities of long term debt – $ 160,000
Total Current Liabilities – $ 600,000
The Calculation of OCL can be done as :
Total current liabilities
Short term debt
Income taxes payable
current maturities of long-term debt
Other current liabilities
When to disclose other current liabilities separately?
Management must evaluate this question carefully before any disclosure is being made. Most of the times company regulations are clear on what amount of threshold based on percentages, account needs to cross in order to be separately disclosed on the balance sheet.
It is industry practise however that if other current liabilities are more than 10% of current liabilities, they need to be shown separately. Note to financial statements needs to be attached to the balance sheet explaining the breakup of other current liabilities if possible. Hence, management has to be careful in doing so.
Further, the audit concept of materiality may be imposed in this scenario whether they need to be identifiable. This would depend on the nature and size of liabilities under other current liabilities.
Other current assets are type of categorization of assets. These are residual current assets that have not been specified by the company or regulations or do not meet the criteria of being classified separately.
They are referred to as they are uncommon and insignificant like the current assets as cash, accounts receivables and prepaid expenses. Other current assets are listed under the assets side of firm’s balance sheet. Other current assets are characterized as uncommon or insignificant.
Other current assets are rarely recorded in the financial statements, hence, the net balance in other current assets account is typically small.
Understanding Other Current Assets (OCA)
The major components of assets are either fixed assets or current assets. Fixed assets are non-current assets such as buildings, printers, plant and machinery. These assets have span of more than 1 year and are beneficial in the long run.
On the other hand, current assets are short term assets whose benefits will accrue within 12 months. They are the assets that can be easily sold, utilized, consumed or exhausted in the process of daily operations. Current assets include cash, marketable securities, inventory and prepaid expenses.
Current assets that are not specified or uncommon won’t be categorized under current assets. Instead they will be thrown into residual heading of other current assets. Instead, these assets will be taken to a generic “other” category and would be recognized as other current assets (OCA) on the balance sheet.
Examples of other current assets shall include:
Restricted cash or investments
Advances paid to employees or suppliers
Cash surrender value of life insurance policies
Property that is being readied for sale
Marketable securities in negligible balance
Special Considerations in case of other current assets
For publicly listed companies, they have to give clear breakdown of other current assets in their quarterly and annual filings. However, they represent no so significant amount of expense. Hence, the companies may chose to ignore showing other current assets separately.
However, OCA would be placed under footnotes to financial statements. Rarely explanations are needed for OCA. However, when needed, the company shall offer the explanations in notes to accounts.
Other current assets are generally assumed to be disposed off within a accounting cycle that would be 12 months. The nature of each OCA needs to be determined. It is important for the management to know about the liquidity of OCA.
If accounts in other current assets in the past year become material in the current year, it may need to be disclosed into major defined current assets accounts. This would slowly create insightful information in the minds of investors.
The simple calculation for OCA would be by subtracting from current assets, the current asset accounts as cash & cash equivalents, accounts receivable, marketable securities, inventory, and prepaid expenses.
it is represented as,
OCA = Total Current Assets – Cash & Cash Equivalents – Accounts Receivable – Marketable Securities – Inventory – Prepaid Expenses
Let’s take the example of Sinra Ltd that had recently filed its annual financial statements. The following details about current assets were available
Cash & Cash Equivalents – $ 100,000
Accounts Receivable – $ 200,000
Marketable Securities – $ 30,000
Inventory – $ 160,000
Prepaid Expenses – $ 50,000
Total Current Assets – $ 600,000
The Calculation of OCA can be done as:
Total current assets
Cash and cash equivalents
Other current assets
When to disclose other current assets separately?
This is tricky thing for the management as well. Most of the times company regulations are clear on what amount of threshold based on percentages, account needs to cross in order to be separately disclosed on the balance sheet.
It is industry practice however that if other current assets are more than 10% of current assets, they need to be shown separately.
A note to financial statements needs to be attached to balance sheet explaining the breakup of other current assets if possible. Hence, management has to be careful in doing so.
Further, the audit concept of materiality may be imposed in this scenario whether they need to be identifiable. This would depend on the nature and size of assets under other current assets.
The statement of comprehensive income depicts the changes in equity over the given time frame. In other words, it explains why the net assets have changed over a given period of time. There are mainly two components for the statement of comprehensive income: Net income and other comprehensive income (OCI).
Net income is the difference between revenues and expenses and is obtained from the income statement. On the other hand, OCI includes all other items that are excluded from the purview of the income statement.
The amounts of OCI are not included in the entity’s net income or retained earnings but just on the OCI component of the statement of comprehensive income.
Condensed Statement of Comprehensive Income:
Condensed means being short. That would mean condensed statement of comprehensive income summarizes all the portions of income statement and OCI into few captions and amounts.
Generally, condensed statement of comprehensive income would show only the headings excluding the details that were being shown its more lucid form i.e. statement of comprehensive income.
The users of the condensed income statements would find it easier to go through this statement glancing directly at what the company has been doing.
Let’s take an example of a trading company.
The condensed income statement of trading company would summarize different categories of sales into one amount with description of net sales. The details regarding purchases and other changes in inventory are presented under cost of goods sold heading directly.
The numbers of operating expenses like selling expenses, administrative expenses, etc. would be presented under Operating expenses.
Breaking down Condensed Statement of Comprehensive Income
The most important part of the condensed statement of comprehensive income is the income statement. The income statement provides details on revenues and expenses, including payable taxes and interest charges. The main purpose of an income statement is to present net income.
However net income only serves the purpose of earned income and expenses. Certain gains and losses regularly occur from fluctuations in the value of their assets. They are to be recognized in other comprehensive income. It consists of items such as:
Unrealized gains or losses from debt securities
Adjustments made to foreign currency transactions
Unrealized gains or losses from available-for-sale securities
Gains (losses) from pension programs
Gains (losses) from derivative instrument
Format of Condensed Statement of Comprehensive income
A basic format for condensed statement of comprehensive income is given below:
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Cost of goods sold
Income from operations
Income before taxes
Other comprehensive income for the year, net of income tax
Total comprehensive income
Net income (loss) attributable to Shareholders
Total comprehensive income (loss) attributable to shareholders
Basic Earnings per share
Uses of a Condensed Statement of Comprehensive Income
The Condensed Statement of Comprehensive Income entails the summary of the income statements and other comprehensive income.
It shows the eagle-eye view of all the operating and non-operating income and expenses in one statement. Here are some of the uses of the Condensed Statement of Comprehensive Income:
1. Summary of revenue and expenses information
The Condensed Statement of Comprehensive Income provides the figures of the sales revenue and cost of goods sold. Further it can provide category of operating expenses such as selling expenses and administration expenses.
2. Simple Analytics tool for investors
The components as income statement and statement of comprehensive income are financial reports. Investors are very much interested in these financial reports for decision making in evaluation of investment.
The higher the condensed statement shows about earnings, the more profitable it would be for investors to make a suitable investment.
Limitations of a Statement of Comprehensive Income
A condensed statement of comprehensive income is a summary of the income statement and other comprehensive income. It does not break the headings into various accounts. Hence, the statement falls short in some manner.
The statement is based on the accrual system of accounting meaning that all the expenses that need to be incurred during the year would be recorded although the cash flows are not necessary. This has to be checked from the statement of cash flows to give a rear view of the company.
2. Difficulties in making predictions
Condensed statement of comprehensive income does not provide details on whether the firm will succeed. It is based on historical data to compute earnings per share and other past financial records.
Hence, investors make certain assumptions to forecast the earnings of the company for investment purposes although it’s difficult in making such assumptions.
Cost Of Goods Sold (COGS) represents all the direct costs of the products manufactured and sold by a business. For most manufacturing businesses, the COGS will consist of material and labour costs that contribute directly to the value of a product.
COGS will, however, exclude any indirect costs. Indirect costs are costs that don’t directly contribute to the value of a product. These may include costs such as research and development, selling and distribution, etc.
The Cost Of Goods Sold of business is straightforward to calculate. First of all, the business must establish the cost of its products. It helps the business in determining the costs of its inventory, which is a required part of the COGS calculation.
COGS calculation mainly includes calculating the exact cost of the goods which the business sells. It is important because of the matching concept of accounting, which requires expenses to match with the related revenues.
A business can use the following formula to calculate its COGS:
Cost Of Goods Sold = Opening Inventory + Purchases – Closing Inventory
Is Cost Of Goods Sold The Same As Expenses?
While the Cost Of Goods Sold is technically an expense that business bears on goods it produces, it is different from other types of expenses. From an accounting point of view, COGS is an expense for a business.
However, businesses don’t usually calculate their COGS until the end of an accounting period when they are preparing the Statement of Profit or Loss. The Statement of Profit or Loss is also where a business presents its COGS separate from other expenses.
COGS and other expenses appear separate in the statement to differentiate between the COGS, which is the main cost for any business that deals in inventory, and other costs, which may also apply to all businesses.
The COGS also represents all the costs that business bears directly on producing a product for sale. On the other hand, other costs are those which a business must bear to keep it running but may not directly add to the cost of a single product.
There’s also a difference between expenses and costs, that businesses must understand. While these differences are minor, they are still worth considering.
Cost vs Expense:
The main difference between cost and expense is that cost refers to the amount a business spends on the acquisition or production of an asset. On the other hand, expense refers to the amount that it spends for its operations to ensure it can generate revenues in the short and long run.
While this is the general difference between cost and expense, there are also many more differences.
The term cost refers to the investment of a business in the purchase or production of an asset. It doesn’t matter whether it is for a fixed asset or inventory.
A business bears costs with the expectation of benefiting from it in the future. Expenses, on the other hand, are not investments, but rather a tool for a business to help in its objective of revenue generation.
Businesses also bear costs once and add them to the value of the asset for which it bears the cost. On the other hand, expenses are more regular. Similarly, costs relate more to the Statement of Financial Position or balances.
However, costs may sometimes also relate to the Statement of Profit or Loss but must follow the matching principle of accounting. Expenses, on the other hand, only relate to the Statement of Profit or Loss and are transactions rather than balances.
Similarities of COGS with expenses
As mentioned above, the Cost Of Goods Sold is an expense in the Statement of Profit or Loss. Therefore, it is similar to other expenses of the business. However, in the statement, the COGS is presented separately from other expenses. There are many reasons why they are separated.
The first reason is that it is necessary for the calculation of Gross Profit and needs to be separated. The second reason is that COGS is fully tax-deductible as opposed to other expenses. However, in essence, COGS is an expense the same as other types of expenses.
Differences of COGS with expenses
While COGS may be similar to expenses, there is still a difference. The difference is due to the source of costs and expenses. With costs, the money of a business goes towards the manufacturing of products of a business.
As mentioned above, costs are more of an investment rather than an expense. On the other expenses go towards keeping the business operational and not towards any product. In summary, COGS and expenses are different because COGS shows the direct expenses of business while other expenses are indirect.
The Cost Of Goods Sold represents all the direct expenses of a business in the Statement of Profit or Loss. Businesses calculate COGS following the matching principle of accounting. There are some differences between the COGS of a business and other expenses.
A business must first consider the difference between costs and expenses generally, to understand the difference between COGS and other expenses. The similarity of COGS with other expenses is that they are all expenses in the Statement of Profit or Loss. The difference is that COGS represents direct costs, while expenses represent indirect costs.
Companies commonly arrange a condensed financial statement along with the customary financial statements. The core groundwork on these documents function to serve various legal commitments and usually associates with an episodic audit.
Nevertheless, except for substituting comprehensive financial statements, condensed financial statements turn out to be the additional documents or precise supplementary papers essential during the auditing procedure.
What Are Condensed Financial Statements?
Condensed financial statements are defined to be the brief version of a business’s income statement, cash flow statement, and balance sheet, all collectively put into a particular financial document.
These brief reports are made to deliver a rapid outline of the business’s financial position with appropriate detail, and usually for internal procedures.
Purpose of A Condensed Financial Statement
A condensed financial statement is made to deliver quick and accurate information about a business’s financial position and a brief look on where the business’s finances stand during that period. The condensed statement also mentions all the variations in the financial position of the business.
Usually, businesses aim on arranging condensed statements all around the year along with the annual financial statements.
Moreover, businesses also require condensed financial statements at times to assist the calculated demonstration of concise data to business associates or likely through the introductory periods of conciliation.
Understanding Condensed Financial Statement
Businesses arrange condensed financial statements during the year in expectancy of their monthly or yearly reports. These are often envisioned to be useful for internal as well as external auditing, except a shareholder or predictor use.
Condensed financial statements show a similar general financial image of the business as any regular financial statements, but in a much concise manner; each item condensed to only one line for briefness.
For example, the condensed financial statement offers only one line for the “total revenue,” while the full financial account will have the revenue by products, services, operating division, interest, and various other sources of revenue.
When inspecting condensed elements of financials, it is important to be more careful while observing each item line. The lesser the data, the simpler the analysis.
However, that same lack of detail can bring in bigger essential complications to the firm. To cross-check the condensed version, a full set of financial statements can be very helpful.
So while reviewing, the full statements will comprise of releases and line items that might have been exempted from the condensed form of the financial statement.
Preparing a Condensed Financial Statement
Financial data with usually several dedicated lines in a full financial statement, only receives a single line to represent that data in the condensed form. Therefore, a representative condensed financial statement normally comprise of one line for expenses, financing income, revenues, cost of goods sold, and net income.
While preparing a condensed financial statement, only relevant pieces of financial data are included. It forms a summary version of the information presented on a complete financial statement with detail.
Condensed financial statements document and calculate assets and liabilities for temporary recording using the financial data available on a year-to-date basis.
Due to practical reasons, the formation of condensed financial accounts usually makes more profit on approximation approaches as related to comprehensive or full financial statements.
A regular set of condensed financial statements would generally include statement of comprehensive income, changes in equity, cash flows, financial position, and particular descriptive notes.
What Is The Use Of Condensed Financial Statements?
Condensed financial statements are an exceedingly accumulated form of the financial statements, with various line items being concise into just a few lines. Using this method, the demonstration of financial data can be simplified, often consolidating all three of the financial statements into a single page.
Example Of Condensed Financial Statement
Below is a condensed financial statement version, presenting a single line dedicated for each item: revenue, expenses, etc.
Overall, the condensed financial statement is used to outline the financial reporting using the least possible content. The aim is to deliver a rapid and brief summary of a business’s financial standing.
Alongside a set of reports, it displays the present “interim” time period and relative “interim” previous period’s financial data (even without being a whole long statement).
Interim periods typically possess particular financial accounts with a comprehensive or condensed form of financial statements dated for less than a fiscal year.