'Unearned Service Revenue' Definition:

Unearned Service Revenue is a liability account that is used to record advanced collections from clients. In other words, it pertains to revenue already collected but the service has not yet been rendered.Also known as: Advances from Customers or Customer's Advances

Contents:
  1. Definition of unearned service revenue
  2. Classification and presentation
  3. Journal entries
  4. Examples

Classification and Presentation of Unearned Service Revenue

Unearned Service Revenue is a liability account. It is usually included as part of current liabilities in the balance sheet.

Unearned service revenue is considered a liability because the company has an obligation to perform services for the amount it collected in advance.

Unearned Service Revenue Journal Entries

Advances from customers can be initially recorded as Unearned Service Revenue (a liability) or Service Revenue (income). The accounts will then be adjusted later when the services are rendered or at the end of the accounting period by preparing adjusting entries. The adjusting entry will depend upon the method initially used.

If the advances are recorded initially as a liability, the entry would be:

Cash xx.xx  
Unearned Service Revenue   xx.xx

The adjustment for services rendered would be:

Unearned Service Revenue xx.xx  
Service Revenue   xx.xx

If the advances are recorded initially as revenue, the entry would be:

Cash xx.xx  
Service Revenue   xx.xx

The adjustment to set up the liability (the portion not yet rendered) would be:

Service Revenue xx.xx  
Unearned Service Revenue   xx.xx

Examples

On December 1, 2015, a customer paid EKOZO Company $6,000 as advanced payment for future services. At the end of the year, the company was able to render him services amounting to $2,000.

Method 1: If the company records it initially as Unearned Service Revenue, the entry would be:

Cash 6,000.00  
Unearned Service Revenue   6,000.00

At the end of the year, the following entry is made to transfer a portion to Service Revenue:

Unearned Service Revenue 2,000.00  
Service Revenue   2,000.00

Method 2: If the company records it initially as Service Revenue, the journal entry would be:

Cash 6,000.00  
Service Revenue   6,000.00

At the end of the year, the following entry is made to adjust the accounts. The portion that has not yet been rendered should be transferred to Unearned Service Revenue.

Service Revenue 4,000.00  
Unearned Service Revenue   4,000.00

The resulting balance of Service Revenue is the same under the two methods. The balance of Unearned Service Revenue under the two methods is also the same.

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