Corporate accountants keep track of myriad types of revenue that flows through companies, most of which bear enigmatic or even misleading names. Accrued revenue and unearned revenue, two types of capital common on company ledgers, count amongst these many revenue streams. Stark contrasts exist between these types of capital; enough so that in a very basic way accrued revenue constitutes the opposite of unearned revenue. Bookkeeping methods for each differ greatly as well.
Accrued revenue is capital not yet received during a fiscal period for services already rendered. It usually assumes the form of interest or future payments due on items sold on credit or installment plans. For instance, assume your company provides a loan valued at $10,000 in December with a repayment date the following March and a total of $2,000 interest. The recipient of the loan pays you the full value of the loan in March, including interest. While the interest fees for December, January, February and March all come at once, this $2,000 payment actually comprises four $500 installments of accrued revenue.
Unearned revenue is capital received for services not yet rendered. It assumes a variety of forms, from rent paid in advance to contracts made before the delivery of services. For instance, assume your company rents office space and pays its landlord $50,000 in December for rent covering the period of January through May. This constitutes unearned income for the landlord until January, at which point the rendering of services begins. The same holds true for contracts. If you receive $100,000 in November for a contract beginning the following January, this constitutes unearned revenue until the period of the contract begins. Upon the commencement of services, unearned income begins converting to earned income and concludes doing so upon the conclusion of a contract term.
Accrued Revenue Vs. Unearned Revenue
Accrued revenue and unearned revenue are opposite concepts in a fundamental way. While accrued revenue is capital not earned on services already provided, unearned revenue is capital already earned on services not yet provided. The nature of unearned revenue proves relatively obvious given the name – capital not yet earned through services. The nature of accrued revenue proves less immediately evident. The term gains its name from the fact that as a company accrues capital from services previously rendered, it officially records them.
When a company renders goods with the promise of interest or future payments, it notes the value of services rendered as a debit in the company ledger. As a company accrues payment for services rendered, accountants adjust the financial books by moving portions of the debited income to the earned income portion of a ledger. When a company receives unearned income, it notes the entire amount as a liability. Upon providing services for unearned income, it moves the liability to the earned income area of a ledger.