What is Unearned Revenue?

Unearned revenue is a customer payment for which no goods or services have yet been provided. Until goods or services have been provided to the customer, this payment is classified by the seller as a liability. The key characteristics of unearned revenue are as follows:

Triggered by a prepayment. It occurs when customers pay for a product or service before the company fulfills its obligations.
Results in a liability. Until the company delivers the goods or services, the unearned revenue is recorded as a liability because it represents an obligation to the customer.
Recognition is delayed. As the goods or services are delivered over time, the liability is reduced, and the revenue is recognized on the income statement.

What is Unrecorded Revenue?

Unrecorded revenue is a sale that has been earned, but for which no record has yet been made in a firm’s accounting system. This situation most commonly arises when a customer contract stipulates that no billing can be sent to the customer until all work on the underlying contract has been completed.

Comparing Unearned Revenue and Unrecorded Revenue

The following differences exist between unearned revenue and unrecorded revenue:

Unearned revenue has been recorded in the accounting system (as a receipt of cash and an offsetting liability), while unrecorded revenue has not been recorded at all.
A business has not yet earned unearned revenue, while it has earned unrecorded revenue.
A business has received the cash associated with unearned revenue, while it has not received any cash associated with unrecorded revenue.

For example, Grouch Electronics receives an advance of $10,000 from a customer for a home theater installation. Grouch has not yet performed any work on the contract, and so records the receipt as a liability. This is a case of unearned revenue. If the customer had not paid an advance and Grouch had performed the work without issuing an invoice to the customer, then this would have been a case of unrecorded revenue.