Accounting for unearned revenue
Unearned revenue is usually classified as a current liability for the business that receives it. When a business takes in unearned revenue, it must record the payment by debiting its cash account for the amount of money received in advance and crediting its unearned revenue account. As the company earns that revenue, it reduces the balance in the unearned revenue account (with debit entries) and increases the balance in the revenue account (with credit entries).
Using our example, when the landscaping company receives its $200, it will debit its cash account in the amount of $200 and credit its unearned revenue account in the amount of $200. Once it provides the first lawn service, it will record a debit to its unearned revenue account in the amount of $40. At that point, its balance sheet will report the remaining liability in the amount of $160, and its income statement will report that $40 was earned. In other words, that $40 will be converted from unearned revenue to earned revenue. The company will then repeat the same process each time a lawn service is performed until its liability is reduced to zero.
