Revenue can be defined as the compensation that the company receives in exchange for goods and services that the company has provided over the course of time.
Revenue can be defined as either earned or unearned. As far as earned revenue is concerned, it can be seen that this is the amount equivalent to the worth of goods and services that the company has provided to their clientele.
On the other hand, as far as unearned revenue is concerned, it is the amount equivalent to the goods and services that the company is yet to provide to their customers.
However, compensation for these goods and services have been received in advance. Therefore, the company cannot justify this particular receipt as a result of which it is classified as a Current Liability in the Financial Statements.
This amount stays as a current liability until the point where the company is able to service this particular debt, after which it is subsequently treated as revenue, and income generated from sales.
The nature of account for unearned revenue is basically a Current Liability.
This is because this is the amount that the company has received in advance from their customer against which they are liable to provide their subsequent services.
The journal entry that is required to record Unearned Revenue is as follows:
Debit – Cash / Bank
Credit – Unearned Revenue (Current Liability)
Examples of unearned revenue mainly occur in cases where it can be seen companies are likely to take payments in advance, like construction companies or service providers, which are reliant on advance service collections.
Therefore, this particular amount is treated as a Current Liability, to the point where the company is able to exercise this advance revenue to be treated as earned revenue.
Converting unearned revenue into earned revenue depends on the service or product delivery timeline. As a matter of fact, it is an essential factor that needs to be embedded in order to determine the exact change of category from unearned revenue to earned revenue.
According to accounting standards, it can be seen that a sale transaction is said to have been completed when the risks of holding and storing these certain goods have been transferred to the other party, i.e. the buyer.
Therefore, this means that sales or sale revenue can only be recorded once the subsequent risks have been passed on, and in most cases, this tends to be the point of delivery of the respective goods and services in this regard.
Therefore, to conclude the information that has been presented above, it can be seen hat unearned revenue is mainly recorded as earned revenue when the proper transaction has been completed in terms of fulfilling the basic requirements, pertaining to the fulfillment of these transactions in terms of risk transfer.
Furthermore, it can also be evaluated that unearned revenue is mainly earned when the company is able to justify the amount it has received in remuneration of the said goods and services.