Accounting can be really confusing at times. I’m sure I will have many people agreeing to this. Accounting is very useful to the business in projecting and reporting their performance to the general public. Right Accounting plays a key role in this regards. But what will happen if you are not sure about many terms used in Accounting. Lack of understanding of key terms will result in errors in the accounting records too.
For a company, revenue is the total amount of money received by selling goods and services. But what do the terms Unearned Revenue and Unrecorded Revenue mean? Do both mean the same or they have different meanings?
Let us find out.
The term Unearned revenue is nothing but prepaid revenue. There may be instances where the customer pays in advance for services that have not yet been delivered by the company. So unearned revenues refer to revenue received in advance but which is not yet earned. Unearned revenue is an important concept in accounting because the company cannot recognize the revenue until it provides the good or service to the customer who paid for it. This is advantageous from a cash flow perspective for the seller, who now has the cash to perform the required services. On the other hand unrecorded revenue are the revenues that the company has earned, but not yet recorded in its accounting records. For example if a business has done work for a client but has not yet created an invoice, there is unrecorded revenue that must be recorded.
When unearned revenues are concerned, the income statementdoes not reflect that the company has made a sale until it has earned the income by delivering the goods/ services to the customer. But the Balance Sheet would show that the company increased its cash and at the same time it incurred a liability for the transaction, as the goods/ services are still to be delivered to the customer. As a company earns the revenue, it reduces the balance in the unearned revenue account (with a debit) and increases the balance in the revenue account (with a credit). The unearned revenue account is classified as a current liability on the balance sheet.
The accounting treatment for unrecorded revenue is to accrue revenue in the period when the revenue is earned, using a credit to an Accrued Revenue account, and a debit to an Accounts Receivable account.
Even though both are Revenue accounts they are completely opposite in nature and right treatment of these revenue accounts will be positively reflected in the financial statements thereby giving a true picture of the business to its stakeholders.