If you run a business that offers services, you may receive payments from customers in advance. These payments are known as unearned fees or deferred revenue, as the services have not yet been provided. To properly account for unearned fees, it is important to understand the basics of journal entries. When a customer pays for services in advance, the payment is recorded as a liability on the company’s balance sheet. This is because the company has not yet earned the revenue from the services. Once the services have been provided, the liability is reduced and revenue is recognized. The following journal entry is used to record unearned fees:
Debit: Cash or Accounts Receivable depending on how the payment was received) Credit: Unearned Fees The above entry records the payment as a liability and reduces the cash or accounts receivable account, depending on how the payment was received. The unearned fees account is credited, which indicates that the company Unearned Fees owes the customer the services. The above entry reduces the unearned fees account and recognizes the revenue from the services. This results in an increase in the revenue account and a decrease in the liability.
It is important to properly record unearned fees in order to accurately reflect the company’s financial position. If unearned fees are not recorded correctly, it can result in an overstatement of revenue and an understatement of liabilities. This can lead to inaccurate financial statements and misinformed business decisions. Another consideration when recording unearned fees is the timing of revenue recognition. Generally, revenue should be recognized when the services have been provided and there is evidence of an agreement with the customer. However, in some cases, revenue recognition may need to be deferred if there is uncertainty around the completion of the services.
