Payment received before a good is sold or a service is provided. In the trial balance the accounts would appear as follows. Financial Analysis What types of companies tend to have the most deferred revenue?
About the Author Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. Financial Analysis. Contra revenue accounts are useful when in bookkeeping terms a business needs to keep the two accounts separate so as not to lose information, but for presentation reasons in the financial statements, it is necessary to offset them against each other and show a net balance.
As a company delivers services or products, deferred revenue is gradually recognized on the income statement as the revenue is "earned.
Revenue Recognition Revenue recognition is a generally accepted accounting principle GAAP that determines the conditions for realizing income as revenue. Using the two accounts, allows information about the original sale to be maintained on the revenue account, and details of the sale returns to be maintained on the sales returns contra revenue account.
When the two balances are offset against each other they show the net balance of both accounts. Financial Advice. Unearned revenue is considered a liability because the business has an obligation to provide the goods or services represented by the sum paid to it.
You May Also Like. What it is: The net balance of the two accounts shows the net value of the sales made by the business for the accounting period. Net balance after offset. What is a Small-Cap Stock? What's the Difference? The sales allowances account is similar in use to the sales returns account, except that it deals with allowances given against a defective product which the customer has kept and not returned to the business.
Unearned revenue is not a contra revenues account.
Related Terms Unearned Revenue Unearned revenue is money received by an individual or company for a service or product that has yet to be fulfilled. Deferred revenue is important in accurate reporting of assets and liabilities on a company's balance sheet.
It is revenue received but not earned yet. Sales returns contra revenue account Sales allowances contra revenue account Sales discounts contra revenue account Sales Returns The sales returns contra sales account records the sales value of goods returned by a customer. Why it Matters: Earned means that the transaction producing the revenues has been completed, while realizable means that the revenue has a reasonable chance of being collected by the business.
Unearned revenue is a liability. 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. Answer added by umer zubair, international sales executive , digital globe service 4 years ago.