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Chapter 3

ACCOU-2140 Chapter 3: Part Three

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Chapter 3. Adjusting Accounts for Financial Statements
Deferral of Revenue
Unearned Revenue is cash received in advance of providing products and services. Unearned
revenues, or deferred revenues, are liabilities. When cash is accepted, an obligation to provide
products or services is accepted.
As products or services are provides, the liability decreases, and the unearned revenues
become earned revenues. Adjusting entries for unearned revenue decrease the unearned
revenue (balance sheet) account and the increase the revenue (income statement) account, as
shown below adjusting entries for prepaid expenses increased expenses and decrease assets, as
shown below in the T-accounts. This adjustment shows the using up of prepaid expenses. To
demonstrate accounting for prepaid expenses, we look at prepaid insurance, supplies, and
depreciation. In each case we decrease an asset (balance sheet) account and increase and
expense (income statement) account.
DEBIT Liability
CREDIT Revenue
Unearned revenue is common in sporting and concert events. For Example, when the Boston
Celtics receive cash from advance ticket sales, they record it in an unearned revenue account
called Deferred Game Revenue.
Unearned Consulting Revenue
Paul’s General has unearned revenues. The company agreed on December 26 to provide
consulting services to a client for 60 days for a fixed fee of $3,000.
Step 1: On December 26, the client paid the 60-day fee in advance, covering the period
December 27 to February 24. The entry to record the cash received in advance is
Assets = Liabilities + Equity
+ 3,000 +3,000
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