Definition and meaning:

Unearned Revenue:

Unearned revenue is the cash obtained from a customer in advance of providing the goods or services they are purchasing.

It is considered a short-term liability instead of revenue because as per the revenue recognition principle of accounting, revenue is reported only when it is earned.

Since the company owes money to its clients as the obligations have not been performed yet, unearned revenue is reported as current liability on the balance sheet of a company.

Unearned revenue improves the liquidity and cash flow as the company now has enough cash to carry out its obligations easily. However, it may result in significant liabilities, which is rarely considered a good thing on your financial statements.

Unrecorded Revenue:

Unearned revenue is revenue or income that has been earned by a company but not yet recorded in its financial statements. This usually happens when the company has already provided the goods and services to its client but has not invoiced the customer yet.

As per the matching principle of accounting, all revenues and matching expenses should be reported in the same period they have been earned and incurred, respectively.

Unrecorded revenue goes against the matching principle of accounting as it results in revenue being recorded in a later period than it was actually earned in.

Financial Accounting and Reporting:

Unearned revenue is credit in nature and is reported as a real account in the books of the company. The journal entry to record unearned revenue is as follows:

Cash DR        xx

           Unearned Revenue CR     xx

As the company supplies the goods or services owed and starts performing its obligations, the revenue is gradually earned. To finally recognize the revenue, the unearned revenue account is lessened, and the revenue account is increased as follows:

   Unearned Revenue DR    xx

         Revenue CR            xx

Unrecorded revenue on the other hand, as the name suggests, is not reported during the year.

Related article  IS UNEARNED REVENUE AN ASSET OR LIABILITY?

However, if the company applies the matching principle thoroughly, what it could do is record adjusting entries at the end of the year to accrue the revenue that has been earned but not yet billed. The adjusting entry to record unrecorded revenue would be as follows:

Accounts Receivable DR              xx

          Accrued Revenue CR        xx

Once the invoice is issued in a later accounting period, the entry could be reversed by crediting the accounts receivable and debiting the accrued revenue account.

Examples:

A client purchases a fitness training package of $1,000 in advance where each session costs $50. The fitness trainer will record entry as follows:

 Cash DR        $1,000

               Unearned Revenue CR     $1,000

For instance, the client takes 5 sessions in the first month. The fitness trainer will have earned the revenue of 5 sessions i.e. $250, and by the end of the month, will record it as follows:

Unearned Revenue DR    $250

            Revenue CR             $250

Similarly, for example, a company signs a multi-period contract. One of its terms is to record revenue only when the contract period ends.

Even if the company performs all its obligations and has earned the revenue as per the accounting principle, it can’t record the income in the current period, resulting in unrecorded revenue.