What Kinds of Companies May Have Unearned Revenue?

"Unearned revenue" refers to money that a company has received for products or services that it has not yet provided. The money represents a future obligation, so it goes on the company's books as a liability. Only when the company has fulfilled its obligation -- earned the money -- is the liability removed and the money booked as revenue. Unearned revenue, also called deferred revenue, is common at companies that accept advance payments.


Subscription-Based Companies

A company that provides goods on a subscription basis may show unearned revenue on its balance sheet. A magazine publisher, for example, may get a payment for a year's subscription up front. That money won't be fully earned until the customer has received all the issues in the subscription term. Depending on how the company books revenue, it could wait until the full subscription has been delivered before counting the payment, or it could count it in installments as it fulfills the subscription.

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Prepaid Services

Any company that performs prepaid services can generate unearned revenue. A homeowner might purchase a service contract for an appliance such as a furnace, with a technician coming out every three months to change the filter, clean out the ducts and perform other maintenance. Money paid at the time the customer signs the contract is unearned revenue.


Ticket Sellers

Airlines sell tickets months in advance., but when you buy a plane ticket, you aren't really buying the ticket -- you're buying a seat on a flight. Until the airline provides you with that seat, it hasn't earned the money you paid, so that money is unearned revenue. The same principle applies with tickets sold by sports teams or performing arts venues, or with hotels that accept payment at the time guests make a reservation.



Goods Sellers

In most cases, when people order something from a catalog or online and pay for it in advance, the merchant fills the order immediately so the revenue never spends time "unearned," but a deposit placed on a special order from a manufacturer would be unearned, as is money paid for items on layaway.



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