Unearned revenue represents payments received in advance for goods or services that haven't been delivered yet. Here are some common journal entries for unearned revenue, along with explanations:
1. Receiving Advance Payment:
Debit: Cash (Increase in asset)
Credit: Unearned Revenue (Increase in liability)
Example: A company receives $1,000 for a 6-month subscription to a service.
Journal Entry:
```
Debit: Cash $1,000
Credit: Unearned Revenue $1,000
```
Explanation: The company received cash, increasing its asset. Since the service hasn't been delivered, the company owes the customer a service, creating a liability.
2. Earning Revenue Over Time:
Debit: Unearned Revenue (Decrease in liability)
Credit: Revenue (Increase in equity)
Example: The company provides one month of service to the customer.
Journal Entry:
```
Debit: Unearned Revenue $166.67
Credit: Service Revenue $166.67
```
Explanation: The company has earned a portion of the revenue, reducing the liability and increasing its revenue. ($1,000 / 6 months = $166.67 per month).
3. Refunding Unearned Revenue:
Debit: Unearned Revenue (Decrease in liability)
Credit: Cash (Decrease in asset)
Example: The customer cancels their subscription after 3 months and receives a refund.
Journal Entry:
```
Debit: Unearned Revenue $500
Credit: Cash $500
```
Explanation: The company reduces its liability by the amount refunded and decreases its cash balance.
4. Partial Payment:
Debit: Cash (Increase in asset)
Credit: Unearned Revenue (Increase in liability)
Example: A customer pays $500 upfront for a service that costs $1,000.
Journal Entry:
```
Debit: Cash $500
Credit: Unearned Revenue $500
```
Explanation: The company receives a partial payment, increasing its cash and creating a liability for the remaining services to be provided.
Important Notes:
* Unearned revenue is a liability account and has a credit balance.
* The amount of unearned revenue decreases as the company earns the revenue.
* When revenue is earned, it is recognized as revenue.
* The specific journal entries will vary based on the nature of the business and the specific transactions.
By understanding these journal entries, you can accurately record the financial impact of unearned revenue on your business.