Businesses focus on increasing revenues throughout the month by selling more products or services to customers. Revenues drive the business forward by increasing its financial resources available for future activities. Businesses offer creative methods of payment to customers to entice customers to purchase from them rather than the competitors. Some customers pay money before the company delivers a product or service. The company records unearned revenue at this time, which it reports on the balance sheet.
Balance Sheet Purpose
The balance sheet presents the financial position of the company to financial statement users. The company communicates the financial position by listing each asset, liability and equity account along with the ending balance in each account. Financial statement users gain a perspective of the company’s worth by evaluating the money the company owes versus the assets owned by the business. Financial statement users also compare the types of assets owned and the types of liabilities.
Balance Sheet Preparation
Before the company prepares the balance sheet, the company needs to identify each asset, liability and equity account recorded in the company’s financial records. After identifying each account, the company needs to determine the ending balance in each account. The company lists each asset account and its balance and adds up the total assets. Then the company lists each liability account and equity account along with their balances. The company adds the total liability and equity balances. This total needs to equal the total assets.
Unearned Revenue Classification
Unearned revenue arises when customers pay for products or services before receiving them. The customer pays this money as a down payment, which the company deposits into its bank account. The company still owes delivery of the product or service to the customer, so the company classifies unearned revenue as a liability.
Reporting Unearned Revenue
Since the company considers unearned revenue as a liability, it appears in the liabilities section of the balance sheet. When the company delivers all or a portion of the product or service to the customer, it reduces the balance owed to the customer. The amount earned through the delivery of the product or service represents earned income, which the company reports on the income statement. The remaining balance of unearned revenue appears on the balance sheet.