In the business world, there are two types of revenue that are commonly confused: unearned and deferred. Both represent money that a company has earned, but they are named differently because they come from different sources. Unearned revenue is money that a company earns before it delivers its product or service, while deferred revenue is money that a company earns after it delivers its product or service. Knowing the difference between these two types of revenue is important for financial planning and understanding a company’s current state.
What is Unearned Revenue?
- Unearned revenue is defined as income that a company has received but has not yet earned. This means that the money has been paid upfront by the customer but the company has not yet delivered the goods or services.
- Unearned revenue is also known as deferred revenue. Unearned revenue is recorded on the balance sheet as a liability because the company has a legal obligation to deliver the goods or services. Unearned revenue can arise from long-term contracts, such as magazine subscriptions, where the customer pays for one year in advance.
- Unearned revenue can also arise from sales of gift cards, where the customer pays for the card but does not redeem it until later. Unearned revenue is not considered to be part of the company’s current assets because it is not yet earned. Unearned revenue should be reported separately from other types of liabilities on the balance sheet.
What is Deferred Revenue?
Deferred revenue is revenue that has been received by a company but has not yet been earned. This can happen when a company sells a product or service but does not immediately deliver it. For example, if a customer buys a one-year subscription to a magazine, the company will receive the payment upfront but will only provide the service for 12 months.
In this case, the revenue is deferred until the service is actually provided. Deferred revenue can also occur when a company provides a service but does not immediately bill the customer. For example, if a customer pays for a one-year gym membership on January 1st, the company will not bill the customer until January 1st of the following year. Deferred revenue is often found on a company’s balance sheet as a liability, since it represents money that the company owes to its customers.
Difference between Unearned Revenue and Deferred Revenue
- Unearned revenue and deferred revenue refer to money that a company has received but has not yet earned. The key difference between unearned revenue and deferred revenue is that unearned revenue is recognized as a liability on the balance sheet while deferred revenue is recognized as an asset on the balance sheet.
- Unearned revenue is reported on the balance sheet as a current liability, while deferred revenue is reported on the balance sheet as a long-term asset. Unearned revenue represents money that has been paid by customers for products or services that have not yet been provided. Deferred revenue represents money that has been received by a company for products or services that have not yet been delivered.
- The key difference between unearned revenue and deferred revenue is that unearned revenue is recognized as a liability on the balance sheet while deferred revenue is recognized as an asset on the balance sheet.
Conclusion
Unearned revenue and deferred revenue are both important concepts to understand when looking at a company’s balance sheet. Unearned revenue is money that has been received but not yet earned, while deferred revenue is money that has been earned but not yet received. Understanding the difference between these two items can help you better assess a company’s financial health and predict future earnings.
