What is the difference between unearned revenue and unrecorded revenue?.
In financial accounting, unearned revenue refers to amounts received prior to being earned. For example, if ABC Service Co. receives $24,000 on December 31, 2012 for a one-year service agreement covering January 1 through December 31, 2013, the entire $24,000 is unearned as of December 31, 2012. On the December 31, 2012 balance sheet ABC should report a liability such as Unearned Revenues for $24,000. During 2013 ABC should move $2,000 per month from the liability account on its balance sheet to a revenue account on its income statement.
I associate unrecorded revenue with revenues that were earned, but not yet recorded in a company's accounting records. For example, an electric utility will provide electricity to customers for up to one month before it reads the customers' meters, calculates the bills and records the billings as revenues and accounts receivable. As a result, the electric utility will have up to one month of unrecorded revenue. At each balance sheet date, the utility should accrue for the revenues it earned but had not yet recorded. This is done through an adjusting entry that debits a balance sheet receivable account and credits an income statement revenue account.
Adjusting Entries – Examples.
Let's work with some examples. We are working with a one year accounting period that ends on 12/31/X2.
Let's use a three step process. Step 1 – Analyze the transaction. Step 2 – Record in the journal. Step 3 – Post to the ledger.
Example 1: On 12/31/X2 (before the adjusting process), Supplies, an asset, has a balance of $2,500. Employees take a physical account of the supplies on hand. That physical count reveals that $1,200 of supplies remains.
Step 1 -- The balance of Supplies before the adjusting entry is $2,500. Subtract the amount determined during the physical count ($1,200). The result ($1,300) represents the amount of supplies that have been used up – Supplies Expense.
