As essential operating concepts, unearned income and earned revenue often describe how hard a company works to attract customers, satisfy them and offer major clients interesting deals they can't clinch with rivals. Marketing strategies help the company provide the same high-quality service to clients across its operational spectrum, from stalwart companies to individual patrons and smaller businesses.
Earned revenue represents income an organization can record in its financial statements, because it has fulfilled its part of a contractual agreement or its business partners have explicitly agreed to pay a specified sum of money immediately or in the future. For example, if an organization delivers goods to a customer's warehouse or other designated storage location, the supplier has met its commitment and can earn the revenue coming from the delivery. To record earned revenue, a company's bookkeeper debits the customer receivables account and credits the sales revenue account. The accountant trainee debits the cash account if the client remits funds before merchandise delivery. In accounting terminology, debiting cash -- an asset account -- means increasing money in corporate vaults.
Unearned income is money that a company receives before shipping merchandise to a client or executing its share of a commercial bargain. A client may pay cash upfront and receive goods later on, particularly if the supplier offers attractive wholesale rebates or gradual discounts on bulk orders. For example, a customer may remit $100,000 for gradual orders a vendor must ship over 10 months, capturing a 15 percent discount on gross merchandise value along the way. To record deferred income, a corporate accountant trainee debits the cash account and credits the unearned revenue account.
Notwithstanding their conceptual and practical differences, deferred revenue and earned income often interrelate. The first area of symbiosis is in bookkeeping. When a business meets the requirements for which it received money upfront, it may release financial restrictions around the income and it -- then -- can earn it. The accounting entry at that moment is: debit the deferred revenue account and credit the earned revenue account. Both accounts also connect in the financial reporting process. Unearned revenue -- a liability account -- is integral to a statement of financial position, to which the cash and customer receivables accounts also belong.
Coping With Competitive Tedium
For a business, putting forward discount plans and receiving money in advance for later deliveries is a smart commercial move. This enables the company to gain market share, cultivate tighter and better ties with clients and gradually increase its operating net income.