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In accrual accounting, revenue is recorded when it is earned. When payment is received before the product is sold or the service is performed, it creates an obligation to earn the payment. This is also referred to as a liability. This liability is recorded by entering it in an account labeled unearned revenue. The amount in this account is reduced as the money is earned. Unearned rent is an example of unearned revenue. Adjusting entries are made at the end of an accounting period to record increases of money owed to the business and to recognize revenue being earned.
Understand accounting terminology. An asset is something owned by a business. Accounts receivable is an asset account that is used when a business has earned income, but has not yet collected the payment. A general journal is a list of all the transactions in a business. It has one column for debit entries and one for credit entries. A debit entry is made when an asset is increased or a liability is reduced. A credit entry is made when a liability or revenue is increased, or when an asset account is reduced.
Enter the payment for the services that have not yet been rendered. Enter the amount in the debit column of the general journal. For example, if the amount received is $600, enter $600 in the debit column of the journal. Write "Cash" in the account column.
Enter the amount of payment received in the credit column of the next row in the journal. Write "Unearned Revenue" in the account column.
Calculate the amount of revenue earned. For example, if a business receives $600 for a six-month rental, the amount of revenue earned would be $100 each month ($600/6 months=$100 per month).
Enter the amount of revenue earned. For example, if the amount of revenue earned is $100, enter $100 in the debit column of the journal. Write "Unearned Revenue" in the account column. This entry reduces the amount of unearned revenue by $100.
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Enter the amount of revenue earned in the credit column of the next row in the journal. Write "Revenue" in the account column.
Calculate the amount of revenue that has been earned but not yet recorded or billed to the customer. For example, if $1,000 of revenue has been earned, but $500 of that revenue has not yet been recorded, $500 is the amount of revenue that needs to be entered.
Enter the amount of the revenue in the debit column. Write "Accounts Receivable" in the account column. This records the amount owed to the business by the customer.
Enter the amount of the sale in the credit column in the next row of the journal. Write "Sales Revenue" in the account column of the general journal.
When entering adjusting entries for accrued fees, be certain you are not adding fees that have already been billed to customers. This can cause revenue to be overstated and customers to be billed twice.
Shane Blanchard began writing in early 2010 and has tutored students in accounting, business finance and microeconomics. He graduated from the University of North Carolina, Charlotte with a Bachelor of Science in accounting. Prior to graduating from UNC, he graduated from Mitchell Community College with an Associate of Applied Science in business administration. Blanchard is a licensed property and casualty insurance agent.