Unearned revenue and prepaid expense are the same things but in the context of different people. Unearned revenue is the money received in advance for the services or products that are still to be delivered to the customer at a future date.
This is a liability amount which is an obligation over the company. On the other hand, the prepaid expense is an asset amount in which the company pays some cash in advance for some services that will be delivered to the company at a later date by their suppliers.
Unearned revenue is the money received in advance for services or products that are not yet provided to the customer. It is a prepayment for goods or services by the customer or purchaser that will be delivered later.
Therefore, the company has an obligation liability equal to the revenue earned when the services will be provided to the customer. Unearned revenues are recognized as a liability in the current liabilities section of the balance sheet.
Unearned revenue is a liability because the revenue is not yet earned and the company owes products or services to the customer.
When the services are delivered to the customer gradually over time, revenue is equally recorded and realized in the income statement.
Unearned revenues are recognized as revenue by the following accounting double entry
Dr_Current Liability xxxx
Cr_Revenue earned xxxx
Considering the context, unearned revenue is a prepaid expense for the customer because they have paid in advance for the services that they haven’t yet received.
A prepaid expense is a type of asset on the current assets section of the balance sheet. These are payments made in advance to receive products or services at a later date.
Prepaid expenses are initially recorded as an asset but gradually expensed out in the income statement when the services are received over time.
The company will have received the services from the service providers over the coming periods.
Understanding prepaid expense:
Companies make prepayments for services to receive continual benefits over time. Goods or services of this type cannot be expensed out immediately because the company has not yet received the benefits.
The contract between the service provider and the company may fail and the money received back again.
When a company initially pay for the service in advance, they will debit prepaid expense while credit cash. The company will perform the following accounting double entry
Dr_Prepaid expense xxxx
When the benefits are subsequently consumed, the company performs the following accounting double entry
Cr_Prepaid Expense xxxx
Difference between prepaid expense and unearned revenue by example:
Let’s suppose ABC Company received $100 in advance from a customer for some sort of subscription. This is recognized as a current liability and is unearned revenue for the company.
A prepaid expense is completely the opposite of unearned revenue. When a company pays money in advance to another service provider, it will have to receive the services in the future.
Let’s suppose the company has paid $100 in advance, they will recognize prepaid assets for $100.