As far as unearned revenue is concerned, it can be seen that it is mainly defined as the amount that has been collected from the customer, but in return for the amount that has been collected, subsequent payment has not been collected.
Therefore, as a result of these non-collections, it can be considered as a Current Liability, because of the reason that goods and services are yet to be provided for against the amount that has been collected against these collections.
Hence in this regard, the revenue has been collected but has not been ‘earned’, in the sense that the company is yet to provide goods and services against this particular amount.
Therefore, the accounting treatment for Unearned Revenue is such that in the case when the amount is collected from the customers, it is treated so through the following journal entry.
Debit – Cash/Bank (To record collection of cash)
Credit – Unearned Revenue / (Current Liability) (To reflect that goods still have to be provided for against the cash received)
Subsequently, when the company completes the transaction, it can be seen that they reflect this amount in the Income Statement, which can be reflected in the following journal entry:
Debit – Unearned Revenue
Credit – Income Statement (Now that goods and services have been provided against the amount that has been generated, it can now be considered as Revenue generated from Sales)
Therefore, it can be seen that Unearned Revenue is a temporary account, which reflects the amount that is generated from customer payments that are yet to be serviced.
On the other hand, Accounts Payables can be referred to as the amount that is mainly payable to the creditors in exchange for goods and services that have been utilized or consumed by the company.
As a matter of fact, this particular amount includes figures for the probable payables to the creditors, in exchange for goods and services that they have provided.
This mainly occurs in the case where the company procures goods and services and then chooses to pay for them at a later time period. In this case, they then record the amount as a Current Liability, unless it has been paid for.
The relevant journal entry that is used to record the purchase of goods and services is given below:
Debit – Purchases
Credit – Accounts Payable (Current Liability)
After this amount has been paid for, the journal entry to record the transaction is as follows:
Debit – Accounts Payable
Credit – Cash/Bank
Therefore, it can be seen that the existing similarity between Accounts Payable and Unearned Revenue is the fact that both of them are treated as Current Liabilities.
However, one of them occurs as a result of payment that is received by the company (Unearned Revenue), whilst one of them occurs when the company is liable to pay their suppliers for the goods and services that they have procured over the course of time.
In the case of the Unearned Revenue, the account is supposed to be settled in exchange for goods and services, whereas in the case of Accounts Payable, the liability is settled with Cash.