How to Adjust Accounts for Unearned Revenue
Within the general ledger, several subaccounts exist where amounts are credited and debited. Unearned revenue in accounting takes on a different characteristic than its name implies. Because the revenue is unearned, the small business owner is obligated to perform some aspect to fulfill the obligation to "earn" the revenue. Because unearned revenue becomes an obligation, this creates a liability. Depending on the number of accounts used in the business, some accounts will reflect a credit, such as cash, while other accounts must reflect the amount of outstanding liability.
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Instructions
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Credit the cash accounts to reflect the increase in cash levels due to the revenue influx. For example, a small business is paid in advance for a year's worth of cleaning services for $15,000. The cash account within the general ledger will reflect a $15,000 credit.
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Credit the sales account in the general ledger for the amount of unearned revenue. Continuing the example, the sales account will reflect a $15,000 credit. Because this company uses sales accounts and cash accounts, both will reflect the increase.
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Credit the accounts that handle the costs of operation. Continuing the example, the cleaning business must pay laborers, purchase cleaning supplies and pay insurance premiums in connection with fulfilling the cleaning contract. Because the small business owner is adding amounts to the accounts that handle these operations, they are credited. When amounts are used out of the accounts to complete the operations, they are debited.
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Credit the account that handles accounts payable for the amount that the small business is obligated to repay. Because the small business has been paid in advance for cleaning services, the small business owes the client an obligation of performance. The amount listed in the accounts payable category in the general ledger should reflect the amount it costs the business to perform the service, not the amount the company charged the client. For example, it costs the small business, including all expenses, $9,500 to provide the service. The accounts payable amount will reflect a $9,500 credit because the amount of the obligation increases. As time goes on and the obligation decreases, the accounts payable can be debited according to the decrease in amounts.
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