Some accounting concepts can be very tricky to understand as they seem to have almost the same meanings. To understand how much revenue a company incurs and what fraction of it makes it as the profit of the company, the concept of unearned and accrued revenue is important. While one is a liability of the company, the other is an asset.
Unearned Revenue vs Accrued Revenue
The main difference between unearned and accrued revenue is that unearned revenue is the money that a customer pays upfront to a company for a good or service not delivered yet. While the concept of accrued revenue is that the customer owns the company a certain amount of money for a good or service already provided.
A company receives unearned revenue as a form of prepayment for a good or service that is yet to be delivered. It is considered a liability for the company as the organization is supposed to deliver the service within the due date. This liability converts into revenue earned once the good or service is delivered to the customer. Unearned revenue is also commonly known as deferred revenue.
A company earns accrued revenue in exchange for a good or service but it is the amount for which no cash has been received. In other words, accrued revenues are receivables that reflect the amount of money that the customers owe to the company for goods or services they have already purchased.
Comparison Table Between Unearned Revenue and Accrued Revenue
| Parameters of Comparison | Unearned Revenue | Accrued Revenue |
| Definition | Unearned revenue is referred to as the prepayment for any goods or services that a company is expected to deliver within the due date. | Accrued revenue is referred to as the payment that is yet to be received from the customers despite the goods or services already provided. |
| Asset/Liability | In the balance sheet, unearned revenue is recorded as a liability as the company is yet to provide the goods or services to customers. | In the balance sheet, accrued revenue is recorded as a current asset as the customers own to the company for what has been purchased already. |
| Process | Once the company completes the delivery, then this same amount is shown as revenue on the income statement. | Accrued revenue is shown as earned revenue on the income statement and once the payment is completed it is shown as an adjusting entry to the asset account. |
| Industry | It is very common in the insurance industry as the customers are most likely to pay the coverage for an entire year. | It is a very common scenario in the service industry as the customers are not willing to pay the full money for a service that a company hasn’t yet rendered. |
| Effect | Unearned revenue shows a company’s current liability and hence it directly affects a company’s working capital. | Accrued revenue affects the total net income of the company. |
What is Unearned Revenue?
In simple words, an unearned amount is a prepayment for any goods or services that the company is yet to deliver. Since the company needs to deliver the specific good or service to the customer in due time, it is seen as a debt. This is the reason why unearned revenue is recorded as a liability on a company’s balance sheet.
Unearned revenue is very among companies that provide various insurance policies. For example, a customer pays the insurance coverage of an entire year in a single renewal of payment process. So, the company is now in debt for providing service for a year. A similar case takes place in subscription-based products or services as well. A customer has to make a prepayment on a yearly or monthly basis for using any paid application software.
Once the good or service is provided to the customer, the unearned revenue is recorded as revenue on the income statement. Depending on the duration within which a company is supposed to provide a good or service, unearned revenue is marked as a current and long-time liability (12 months or more).
What is Accrued Revenue?
In accrual accounting, accrued revenue is recorded when a company makes a successful sale though it doesn’t receive any cash. So, accrued revenue is the opposite of unearned revenue. Unlike unearned revenue, in accrued revenue, the customers are in debt as they purchase the service or good and then eventually pay for it.
Accrued revenue is recorded as receivables on the balance sheet. It follows the revenue recognition principle that means the revenue will be recorded during the period when it is earned. They are recorded in the financial statements by an adjusting journal entry.
Accrued revenues are very common in long-term projects, especially in the construction sector. In such cases, the clients usually don’t want to make the entire payment upfront.
Main Differences Between Unearned Revenue and Accrued Revenue
- Unearned revenue is the prepayment for any goods or services that a company is expected to deliver within the due date. On the other hand, Accrued revenue is the payment that is yet to be received from the customers despite the goods or services already provided.
- In the balance sheet, unearned revenue is recorded as a liability whereas accrued revenue is recorded as a current asset.
- Once the company completes the delivery, then the amount of unearned revenue is shown as revenue on the income statement. On the other hand, accrued revenue is shown as earned revenue on the income statement and once the payment is completed it is shown as an adjusting entry to the asset account.
- Unearned revenue is very common in the insurance industry whereas accrued revenue is common in the service industry.
- Unearned revenue shows a company’s current liability and hence it directly affects a company’s working capital. But, accrued revenue affects the total net income of the company.
Conclusion
The main difference between unearned and accrued revenue is while the former is a liability, the latter is an asset. In the case of unearned revenue, the company is in debt to the customers while in the case of accrued revenue, the customers owing to the company.
While unearned or deferred revenue is most common in the insurance sector and subscription-based products companies, accrued revenue is recorded mostly in service sectors.
References
- https://www.sciencedirect.com/science/article/pii/S0278425409000908
- https://elibrary.ru/item.asp?id=36732176