Unearned revenue / deferred income refers to advances received from customers. Technically, it’s not revenue but a liability recorded in the business accounting records.
It’s a liability because cash was received in advance, and the business has not performed its obligations by rendering the services or delivering the products.
When unearned revenue / deferred income is posted in the accounting records, the following journal entry is made.
| Description | Debit | Credit |
| Cash/ bank (Asset) | XXX | |
| Unearned revenue / deferred income (liability) | XXX |
The debit impact of the given transactions’ records cash received by the business. On the other hand, the credit impact records liability because the business acquires a present obligation by acquiring these funds.
Once the business has rendered services or delivered products, the unearned revenue / deferred income is removed from the accounting records with the following journal entry.
| Description | Debit | Credit |
| Unearned revenue / deferred income (liability) | XXX | |
| Revenue (profit and loss account) | XXX |
The debit impact of a given transaction removes liability from accounting records because the business has fulfilled its present obligation by rendering the services or delivering the products. On the other hand, credit impact records revenue as it was earned.
Conclusion
Unearned revenue / deferred income refers to advances received from customers. This advance liability is a present obligation and remains in the balance sheet under the liability heading.
Once the business performs its obligation, the unearned revenue / deferred income is removed, and revenue is recorded in the business books.
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