How to Report Revenue on a Lag With GAAP
Revenue on a lag can refer to revenue transactions that have taken place but the earnings process is not complete. According to U.S. accounting guidelines, known as generally accepted accounting principles (GAAP), revenue can be recorded only when the earnings process is completed. This occurs when items of equal value have exchanged hands or when a good is delivered or service rendered and a promise to pay has been made. Revenue on a lag can be recorded as a current liability.
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Instructions
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Record transactions where cash is received before a sale or service transaction’s earnings process has completed. Examples of this type of transaction are cash received for subscriptions and payments for maintenance service agreements. The journal entry to record the receipt of cash before revenue is earned involves debiting cash and crediting unearned revenue, a current liability account.
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Record revenue as the earnings process becomes complete. Unearned revenue becomes earned revenue due to the passage of time; for example, for every new month that a magazine is sent to a subscriber that month’s revenue is earned. The journal entry to record the earned revenue involves debiting unearned revenue and crediting subscriptions revenue or a similar account.
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Report any remaining unearned revenue at the end of the year in the unearned revenue account as a current liability on the balance sheet. All earned revenue that was previously unearned is reported on the income statement within the section for income from continuing operations.
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