Unearned revenue is the money received by an individual or a company for services or goods that haven’t been supplied or provided yet. This counts as a prepayment for the buyer for goods and services that need to be supplied at a later date.
Unearned revenue would is recognized as a liability for the seller, as the revenue is not yet earned because the good or service hasn’t been delivered. It has to be recorded as a liability on a company’s balance sheet.
Businesses that have subscription-based products or services have to record unearned revenue as it is the way their business is structured.
Receiving prepayments can be advantageous for a company that has to purchase inventory beforehand or pay interest on the debt. Some examples of unearned revenue are rent payments, prepaid insurance, airline tickets, gift cards, and subscriptions for channels or newspapers.
When a company provides the good or service and hence has “earned” the revenue, they have to debit the unearned revenue account in order to reduce its balance and credit the revenue account in order to increase its balance.
The unearned revenue is usually a current liability unless prepayment has been received for the supply of goods or services after a year.
If a company fails to classify the unearned revenue as a liability and instead recognized it as profit or revenue, they are overstating the profit in the income statement and when the service or good is actually provided, the profits would be understated for that time period.
This will go against the matching principle because revenues have to be recognized in the period they were earned, along with expenses that related to that period.
Unbilled revenue is revenue that has been earned by a company or individual but not yet recorded on their accounts. Or it is recognized revenue that has been accounted for but no invoices have yet been sent to the customer.
It basically means that the service or good has been provided to the customer but you have not yet billed them. You could say it goes hand in hand with unearned revenue.
When you receive a prepayment from a customer, it is recognized as unearned revenue and since the customer hasn’t been billed an invoice for the good or service, it is unbilled revenue as well.
So to account for unbilled revenues, companies should include a section in their balance sheets for unbilled receivables to recognize revenue for a given period and should count unbilled receivables toward their total revenue even if an invoice has not been generated or sent to the customer.
Unbilled revenue could be treated in two ways depending on the accounting principle the company is adopting, either accrual basis concepts or cash basis.
If they were recording on accrual basis concept then they would have to debit the Account Receivables to decrease its balance and credit the Income or Sales Revenue account to increase its balance.
While it’s necessary for some businesses to establish relationships through unbilled revenue, minimizing the need for such situations can provide a much clearer idea of your total revenue.