Unearned Revenue accounting

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Dreary

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Lets say you sold magazine subscription in Nov 2008 for $10k, which will all be delivered in 2009.
On Dec 31, 2008, you would do this:
DR cash………….. $10k
………CR Unearned Revenue ………….. $10k
Sales in 2008, does not show any of this sales.
What would you do at end of 2009?
DR Unearned Revenue ………….. $10k
……….. CR cash……………………………………. $10k
And sales would show $10k.
Is this correct? If so, why would cash be reduced by $10k? Not sure what would offset the reduction in Unearned Revenue to balance B/S!
Another question, what is deferred revenue?
 
No you don’t CR cash in the 2009 entry; you CR Revenue (this eventually leads to the sale being realized in equity).
Deferred revenue is just another way of saying unearned revenue. They are the same things.
 
> No you don’t CR cash in the 2009 entry; you CR Revenue (this eventually leads to the sale being realized in equity).
ok, but how would that balance A=L+E?
What will go into equity is *not* the $10k we took out of unearned revenue, rather it’s NI minus dividends.
 
Dreary
“ok, but how would that balance A=L+E”
it balances as follows - your liabilities would decrease by $10K, as you would debit uneaned revenue, and your equity would increase by $10K as you recognise the revenue
so the net effect of L + E = -$10K + $10K
which would equal zero balancing to zero.
Dividends would not affect this transaction in any way.
 
Equity increases because you made a sale? I don’t think so.
 
sales = revenue – which flows thro’ net income into retained earnings - which is part of equity…
 
So, unearned revenue of $10k, when it’s earned, goes to equity? No way, Jose.
 
When the unearned revenue, is earned, i..e. it now relates to the current period, you would recognise the revenue, which would go through the income statement, and thus flow through to equity.
It is the revenue that goes to equity, not the unearned revenue, the unearned revenue which is a liability is reveresed and would now have a zero balance.
 
Lets assume for simplicity’s sake that there are no COGS, other expenses, interest, taxes or dividends. What happens to something when you earn it as revenue? It goes straight through to NI, which flows to retained earnings, which is in equity.
So effectively that’s how the A = L+E balances. Revenue (and the entire income statement for that matter) is an equity account.
 
Lets say you sold magazine subscriptions in Nov 2008 for $10k, which will all be delivered in 2009.
On Dec 31, 2008, you would do this:
DR cash………….. $10k
………CR Unearned Revenue ………….. $10k
Assume before that, there was $40k cash, and $40k Equity.
A……= L……. + E
$50k = $10k + $40k
Nothing on income statement.
_______________________________________________________
On Dec 31, 2009: You all suggest that the entry is something like this:
DR Unearned Revenue ………….. $10k
……….. CR Equity …………………………………… $10k
But wait a minute. Assume that it costs $4k to obtain and deliver the magazines (reduce cash by $4k).
A……= L……. + E
$46k = $0k + $xxk
Income statement:
Sales ….. $10k
COGS……$4k
———–
NI = $6k
Say the $6k goes to Equity :
A……= L……. + E
$46k = $0k + $46k
Now go back to your journal entry, it was:
DR Unearned Revenue ………….. $10k
……….. CR Equity …………………………………… $10k
That can’t be correct.
 
Journal entry flows to EQUITY. It does not credit Equity.
there is a big difference.
If COGS was 4K you have Inventory on the Assets side reducing by 4 K.
so you need to account only for the 6K difference.
You are going to Debit Unearned Revenue - and you have either Accounts Payable or the Revenue account being credited.
the amount depends on the circumstances.
 
You just solved the question yourself.
You receive cash. That cash is on your current assets which balances with unearned *revenue* liability on the balance sheet.
Then you earn the sale by delivering the magazines, unearned revenue as liability is reduced to zero and then moved to revenue on your income statement.
You used COGS to make that magazine in that period, this reduces your cash balance and balances with expense on the income statement. The Net income remaining flows to retained earnings on equity.
Assets are balanced with equity and liabilities.
 
or as CP puts it, the COGS will be a reduction in inventory under current assets. Same difference.
 
sorry folks, I don’t get it.
> You are going to Debit Unearned Revenue - and you have either Accounts Payable or the Revenue account being credited
cpk, there is no accounts payable. I don’t owe anything and I have received the full cash amount.
> Then you earn the sale by delivering the magazines, unearned revenue as liability is reduced to zero and then moved to revenue on your income statement.
AliMan, the trouble with that is that in accounting the B/S has to balance with every single journal entry you make. So, if you clear Unearned Revenue, you must immediately do some thing to balance the sheet.
I know if map1 was here she may would spot what I’m doing wrong.
 
Dreary,
You are overthinking it.
At 12/08 you debit cash [asset] and credit unearned revenue [liability]
In each of the 12 subsequent months, as the revenue is earned, you credit revenue and debit unearned revenue. All revenue flows through as a positive to equity.
Simultaneously, you experience some sort of cost in earning that revenue. In this case you are debiting expense and crediting payables [liability], or cash [asset], or prepaid expenses [asset]. All costs flow through as a negative to equity.
Anyway, you recognize the revenue by crediting revenue [flows to equity] and debiting your liability- unearned revenue.
 
Thanks all…I know this is not needed for the exam, but it’s good to understand how it works.
 
Dreary
Playboy company end-of-year 2007
Current assets:
$100 cash
$50 inventory
Non-current assets:
$100 plant
Total Assets: $250
Long-term Liabilities
$0 (assume short-term liabilities is 0 too)
Equity
$250 paid in capital and retained earnings
A = L + E
250 = 0 + 250 (check)
————————————
you give me $50 for a subscription: (assume no other sales or income):
Current Assets:
$100 + 50 = 150 cash
$50 inventory
Non-current assets:
$100 plant
Total assets = $300
Short-term liabilities:
$50 *** UNEARNED REVENUE ***
Long-term liabilities: $0
Equity
$250
A = L + E
300 = 50 + 250 = 300 (check)
————————————–
Now, I sent your your smut and “earned the revenue.” It cost me 20 dollars in inventory (assume no taxes)
Revenue IS NOW EARNED*** AND THE UNEARNED REVENUE WHICH WAS A LIABILITY IS TRANSFERRED TO REVENUE IN THE INCOME STATEMENT
Income statement:
Revenue - COGS = $50 - $20 = $30
$30 is net income that ***FLOWS*** to retained income
Back the balance sheet:
Current Assets:
$150 cash
$50 - 20 COGS USED = 30 inventory
Non-current assets:
$100 plant
Total assets = $280
Short-term liabilities:
$0*** REMOVED UNEARNED REVENUE (DEBITED)***
Long-term liabilities: $0
Total liabilities = 0
Equity:
$250 paid in capital and previous retained earnings **PLUS** $30 ending retained earnings
= 280
A = L + E
280 = 0 + 280 (check!)
 
if you are going to look at the balance sheet, you need to have reference to the income statement. Everything works cohesively.
 
AliMan, so the entries are::
DR Unearned Revenue ………….. $50k
……….. CR Equity …………………………………… $30k
……….. CR COGS……………………………………. $20k
You got it. That’s what I was looking for. Thanks to all who said the same thing, but it just didn’t click. Could it be the playboy thing?
 
No problem bro, but you owe me a beer if we ever meet at a CFA conference ;)
 
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