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Unearned revenue is generated when a business supplies its services to a customer and the services are invoiced in advance.
For example, suppose a business provides maintenance services and invoices for annually in advance. At the time of invoicing the service has not been provided and none of the revenue has been earned, it therefore needs to be credited to the unearned revenue account.
The percentage of completion method is used to calculate the amount of revenue and income that can be recognized by a business on a long term project. The method is in accordance with the matching or accruals concept of accounting, and ensures that the costs incurred on the project are matched to the revenues arising from that project.
When a business receives a cash advance from a customer for goods not yet delivered, it needs to record this a balance sheet liability and not revenue. When the goods are delivered, the revenue is earned, and the cash advance can be used to clear the balance on the customer accounts receivable account.
A business earns interest on its money deposits of 1,000 but does receive the amount into its bank account until after the month end. As the income has been earned but not received, it needs to be accrued for in the month end accounts.
The double entry bookkeeping journal entry to show the accrued income is as follows:
Deferred revenue is generated when a business supplies its services to a customer and the services are invoiced in advance.
For example, suppose a business provides web design services and invoices for annual maintenance of £12,000 in advance. At the time of invoicing the service has not been provided and the service revenue has not been earned, it therefore needs to be credited to the deferred revenue account.
Service revenue is generated when a business supplies its services to a customer. The services can either be provided for immediate cash payment or more usually the services are provided on account and invoiced to the customer at a later date.
The invoicing of services on account means that an amount of money will be owed by the customer to the business, and this is referred to as a trade accounts receivable or trade debtor.
Credit card sales accounting will vary depending on whether or not the cash register is linked directly to the credit card company and cash is received immediately or whether payment is received from the credit card company at a later date.
As an example, suppose a business has credit card sales of £1,000 and the credit card company charges 2% (£20) as a processing fee.