Unearned Revenue

Unearned revenue is a payment received before a good is sold or a service is provided. Unearned revenue is appears on the left side of the balance sheet as a current liability until it is recognized as earned during the accounting cycle. It is not revenue, since the services have not yet been provided. For instance, pre-payment on a lease contract - the revenue is a liability until it has been earned. "Unearned revenue" accounts are the liabilities of a company, at they need to be paid back to the other party if service is not provided in the future.

One common example for unearned revenue is rent paid to the landlord. A Landlord usually collects the lease of the first and the last month in advance from the tenant. This amount collected in advance reduces the risk that the landlord assumes by renting to the tenant.
Journal entry at the initial reporting of the transaction for rent

                       Debit   | Credit
                        ----------------
Cash                      3000 |         
  Unearned Revenue             |   3000
                               |         

The adjusting entry reporting each month after the delivery of the rent is:

                        Debit | Credit (Rs)
                        ----------------
Unearned Revenue          3000|   		
  Revenue                     |    3000 
                              |

Debit side of unearned rent revenue, which is a liability account, represents a decrease. Credit side of the rent revenue, which is a revenue account, represents an increase.

Some of the companies that seek unearned revenue are telecommunication services, building and construction services etc. they offer the services to the buyers and expect them to prepay for their contract. The benefits derived from unearned revenue to the business are that this revenue can be used for managing a debt or to raise the capital to expand their business. Most successful companies make wise use of this revenue and continue to provide goods and services to their clientele.

Questions:

• What is unearned revenue? How is it accounted?
• How is it beneficial to the companies?