Unearned Revenue

AAA

DEFINITION of 'Unearned Revenue'

When an individual or company receives money for a service or product that has yet to be fulfilled. Unearned revenue can be thought of as a "pre-payment" for goods or services which a person or company is expected to produce to the purchaser. As a result of this prepayment, the seller now has a liability equal to the revenue earned until deliver of the good or service.

INVESTOPEDIA EXPLAINS 'Unearned Revenue'

From an accounting perspective, unearned revenue is a double-edged sword. The early cash flow to the firm is advantageous for any number of activities, such as paying interest on debt to purchasing more inventory. However, by accepting unearned revenue, the firm has then entered a legal obligation to deliver on the terms of the payment. For example, with a prepayment on a lease contract, the revenue is a liability until it has been earned.

VIDEO

Loading the player...
RELATED TERMS
  1. Income

    Money that an individual or business receives in exchange for ...
  2. Passive Income

    Earnings an individual derives from a rental property, limited ...
  3. Earned Income

    Income derived from active participation in a trade or business, ...
  4. Revenue

    The amount of money that a company actually receives during a ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to ...
  6. Operating Cost

    Expenses associated with administering a business on a day to ...
RELATED FAQS
  1. What are the advantages and disadvantages of horizontal integration?

    Under the accrual basis of accounting, the company can only record revenue when it has been earned. Revenue becomes earned ... Read Full Answer >>
  2. How does transfer pricing help business?

    Transfer pricing involves the trade of goods or services between two related companies, and both can come out the winner. ... Read Full Answer >>
  3. How do I calculate my effective tax rate using Excel?

    Your effective tax rate can be calculated using Microsoft Excel through a few standard functions and an accurate breakdown ... Read Full Answer >>
  4. How important are contingent liabilities in an audit?

    Contingent liabilities, when present, are very important audit items because they normally represent risks that are easily ... Read Full Answer >>
  5. How does quantifying fixed overhead volume variance show whether a company is profitable ...

    Fixed overhead volume cannot definitively prove a company is profitable, but it can be used to provide an excellent indication ... Read Full Answer >>
  6. What does inventory turnover tell an investor about a company?

    The inventory turnover ratio determines the number of times a company's inventory is sold and replaced over a certain period. ... Read Full Answer >>
Related Articles
  1. Economics

    What is Unearned Revenue?

    Unearned revenue can be thought of as a "pre-payment" for goods or services which a person or company is expected to produce to the purchaser.
  2. Options & Futures

    Handcuffs And Smoking Guns: The Criminal Elements Of Wall Street

    From godfathers to perps, familiarize yourself with the "criminal elements" creeping around Wall Street.
  3. Bonds & Fixed Income

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  4. Markets

    Free Cash Flow: Free, But Not Always Easy

    Free cash flow is a great gauge of corporate health, but it's not immune to accounting trickery.
  5. Options & Futures

    Putting Management Under The Microscope

    We tell you where to find the telltale signs of corporate misdeeds.
  6. Budgeting

    How Budgeting Works For Companies

    Learn how to break down and understand a corporate budget.
  7. Investing Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  8. Economics

    What are Noncurrent Assets?

    Noncurrent assets are property that a company owns that will last for more than one year.
  9. Investing Basics

    How Much Do CPAs Make?

    If you're considering becoming a CPA, here's what you might expect to earn.
  10. Economics

    Explaining Activity-Based Costing

    Activity-based costing (ABC) is a managerial accounting method that assigns certain indirect costs to the products incurring the bulk of those costs.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center