Unearned fees appear on the
A) balance sheet as a current liability
B) income statement as revenue
C) balance sheet in the current assets section
D) balance sheet in the stockholders’ equity section
Unearned Fees is the amount of money that is received by an individual or company for a service or product that has yet to be provided or delivered. It can be thought of as a “prepayment” for goods or services that a person or company is expected to supply to the purchaser at a later date.Unearned Fees is recorded on a company’s balance sheet as a current liability because it represents a debt owed to the customer. Once the product or service is delivered, unearned fees becomes revenue on the income statement. Receiving funds early is beneficial to a company as it increases its cash flow that can be used for a variety of business functions.
In the initial transaction, the unearned revenue account is debited and the cash account is credited, since unearned revenue is a liability for the recipient of the payment. The unearned revenue account is debited every time a company earns revenue, and the revenue account is credited every time a company earns revenue. On the balance sheet, unearned revenue is typically categorized as a current liability. The company would overstate revenues and profits initially, and then understate them for the additional periods during which the revenues and profits should have been recognized. If such revenues and profits were not dealt with in such a manner, and recognized all at once, then revenues and profits would initially be overstated. Revenues are also recognized at once, but related expenses are not. This is a violation of the matching principle.
Unearned Revenue Journal Entry
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