Unearned revenues, also called deferred revenues, are titles for certain revenues that have not been earned. Though it seems comically intuitive, unearned revenue is very important and often observed in the real world. In accounting, they are represented as liabilities on the balance sheet. This is because it represents an unfulfilled promise for a service by a company to a buyer. Furthermore, it is represented by a credit on the balance sheet, offset by Cash received by the service provider. In order to balance this liability, service revenue is the debit to the balance sheet that matches up with the unearned revenue credit.
Unearned Revenue Explained
Take, for example, a business situation that would exist between a carpet cleaning company and a homeowner. Before any service takes place, the cleaning company shows up at the house and gives the homeowner an estimate. The homeowner seems pleased with the estimate and pays the cleaner on the spot. At this point, the cleaning company has acquired an unearned revenue liability. In all likelihood, the liability will be cleared overtime with service. Until then, the cleaning company has money that they have not yet earned: “unearned revenue.”