How does unearned revenue affect net income

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These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. List of Partners vendors. Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered.

It can be thought of as a "prepayment" for goods or services that a person or company is expected to supply to the purchaser at a later date. As a result of this prepayment, the seller has a liability equal to the revenue earned until the good or service is delivered. This liability is noted under current liabilities, as it is expected to be settled within a year.

Unearned revenue is also referred to as deferred revenue and advance payments. Unearned revenue is most common among companies selling subscription-based products or other services that require prepayments. Classic examples include rent payments made in advance, prepaid insurance , legal retainers, airline tickets, prepayment for newspaper subscriptions, and annual prepayment for the use of software. Receiving money before a service is fulfilled can be beneficial. The early receipt of cash flow can be used for any number of activities, such as paying interest on debt and purchasing more inventory.

It is treated as a liability because the revenue has still not been earned and represents products or services owed to a customer. As the prepaid service or product is gradually delivered over time, it is recognized as revenue on the income statement. Both are balance sheet accounts, so the transaction does not immediately affect the income statement.

This changes if advance payments are made for services or goods due to be provided 12 months or more after the payment date. In such cases, the unearned revenue will appear as a long-term liability on the balance sheet. There are several criteria established by the U. If these are not met, revenue recognition is deferred. According to the SEC, there must be collection probability, or the ability to make a reasonable estimate of an amount for the allowance for doubtful accounts , completed delivery, or ownership shifted to the buyer, persuasive evidence of an arrangement, and a determined price.

The work is done, the company is paid, and the amount is entered as income. Only earned revenue — money exchanged for a good or a provided service is included on the income statement. Income that has been generated but not earned, aka unearned revenue, is not included on the income statement and is considered a liability. Unearned revenue is income you have on your books that is waiting for the goods or services to go with it.

In other words, it's prepaid income. Cash Flow Statement: Since we have an equal increase in both an asset and a liability, the impact to cash is zero. Nothing happens. You can see that there are no cash adjustments on the CF statement. In month three the customer pays. You will notice, however, that the report has not been delivered. So while the company has received cash in this period it will not record revenue.

Deferred revenue remains a liability because the company has not yet delivered the product.