# Unearned Revenue: What It Is, How It Is Recorded and Reported

> **Definition**
>
> Unearned revenue represents payments that a business receives for goods and services that have not yet been delivered.

## What Is Unearned Revenue?

Unearned [revenue](https://www.investopedia.com/terms/r/revenue.asp) is money that a company gets before doing any work or delivering a product or service. Put simply, it's money earned for something that has yet to be delivered. For instance, the fees that Netflix ([NFLX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NFLX)) collects from subscribers every month are unearned revenue because you pay them in advance. Other examples of unearned revenue include magazine and newspaper subscriptions, rent, and [prepaid insurance](https://www.investopedia.com/terms/p/prepaid-insurance.asp). Companies record unearned revenue as a [current liability](https://www.investopedia.com/terms/c/currentliabilities.asp) on their balance sheets because it is expected to be setted within a year. Once delivery is made, the revenue is recognized and transferred to the income statement as earned revenue.

### Key Takeaways

*   Unearned revenue is money that a company earns for something it hasn't delivered yet.
*   Unearned income is recorded as a current liability on the balance sheet and transferred to the income statement as earned revenue once it's recognized after delivery.
*   Examples of unearned revenue include subscription services, rents, and prepaid insurance.

![Unearned Revenue](https://www.investopedia.com/thmb/V1VaOEnf-_6e3HnNMb6BbnTson0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/UnearnedRevenue_Final_4187402-aa562f3cdfef4c4ebb22c69bdb055237.png)

*Unearned revenue gives companies immediate access to cash so they can cover expenses or make investments in their growth. — Paige McLaughlin / Investopedia*

## Understanding Unearned Revenue

Unearned revenue is most common among companies selling subscription-based products or other services that require prepayments. Classic examples include rent payments made in advance, [prepaid insurance](https://www.investopedia.com/terms/p/prepaid-insurance.asp), legal retainers, airline tickets, prepayment for newspaper subscriptions, and annual prepayment for the use of software.

Receiving money before a service is fulfilled can be beneficial. The early receipt of [cash flow](https://www.investopedia.com/terms/c/cashflow.asp) can be used for any number of activities, such as paying [interest](https://www.investopedia.com/terms/i/interestexpense.asp) on debt and purchasing more [inventory](https://www.investopedia.com/terms/i/inventory.asp). 

## Recording Unearned Revenue

Unearned revenue is recorded on a company’s [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp) as a liability. It is treated as a liability because the revenue has still not been earned and represents products or services owed to a customer. As the prepaid service or product is gradually delivered over time, it is recognized as revenue on the [income statement](https://www.investopedia.com/terms/i/incomestatement.asp).

Here’s an example: If a publishing company accepts $1,200 for a one-year subscription, the amount is recorded as an increase in cash and an increase in [unearned revenue](https://www.investopedia.com/ask/answers/101515/does-unearned-revenue-affect-working-capital.asp). Both are balance sheet accounts, so the transaction does not immediately affect the income statement. If it is a monthly publication, as each periodical is delivered, the liability or unearned revenue is reduced by $100 ($1,200 divided by 12 months) while revenue is increased by the same amount.

Unearned revenue is usually disclosed as a [current liability](https://www.investopedia.com/terms/c/currentliabilities.asp) on a company’s balance sheet. This changes if advance payments are made for services or goods due to be provided 12 months or more after the payment date. In such cases, the unearned revenue will appear as a [long-term liability](https://www.investopedia.com/terms/l/longtermliabilities.asp) on the balance sheet.

## Unearned Revenue Reporting Requirements

There are several criteria established by the U.S. [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) that a [public company](https://www.investopedia.com/terms/p/publiccompany.asp) must meet to recognize revenue. If these are not met, then [revenue recognition](https://www.investopedia.com/terms/r/revenuerecognition.asp) is deferred.

According to the SEC, there must be collection probability, or the ability to make a reasonable estimate of an amount for the [allowance for doubtful accounts](https://www.investopedia.com/terms/a/allowancefordoubtfulaccounts.asp), completed delivery, or ownership shifted to the buyer, persuasive evidence of an arrangement, and a determined price.

## Example of Unearned Revenue

Morningstar Inc. ([MORN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=morn)) offers a line of products and services for the financial industry, including [financial advisors](https://www.investopedia.com/terms/f/financial-advisor.asp) and [asset managers](https://www.investopedia.com/terms/a/assetmanagement.asp). Many of its products are sold through subscriptions. Under this arrangement, many subscribers pay upfront and receive the product over time. This creates a situation in which the amount is recorded as unearned revenue or, as Morningstar calls it, [deferred revenue](https://www.investopedia.com/terms/d/deferredrevenue.asp).

At the end of the second quarter of 2020, Morningstar had $287 million in unearned revenue, up from $250 million from the prior-year end. The company classifies the revenue as a short-term liability, meaning it expects the amount to be paid over one year for services to be provided over the same period.

![Morningstar Q2 Balance Sheet](https://www.investopedia.com/thmb/v0UyZmTgvG3087FDQS73swdBHXY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ScreenShot2020-10-27at3.34.43PM-253260b7e64f402aa5b3951a5d781292.png)

*Source: Morningstar. — Morningstar Quarterly Report*

Unearned revenue can provide clues into future revenue, although investors should note the balance change could be due to a change in the business. Morningstar increased quarterly and monthly [invoices](https://www.investopedia.com/terms/i/invoice.asp) but is less reliant on upfront payments from annual invoices, meaning the balance has been growing more slowly than in the past.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. “[Topic 13: Revenue Recognition](https://www.sec.gov/interps/account/sabcodet13.htm).”