Difference Between Accounts Receivable and Unearned Revenue (With Table)

According to accrual accounting, revenue might be recorded earlier than received in the current era. Expenses can be registered earlier than they are payable. Both Accounts Receivable & Unearned Revenue are accruing accounts in the accounting system.

Accounts Receivable vs Unearned Revenue

The main difference between Accounts Receivable and Unearned Revenue is that work has already been completed. Still, payment has not yet been received, on the other hand, in the case of Unearned Revenue, the cost for agreed-upon work has been received in advance, but work has not yet been completed.

All payments due to a business for goods sold on credit or services provided in advance are included in the balance of an organization’s accounts receivable. It is an asset that is easily accessible to the company. Typically, these unpaid invoices are due within a few months after the end of the current accounting year.

Unearned revenue refers to receipts issued for work still in progress or goods that have not yet been delivered to the customer. This results in the firm incurring a liability equivalent to the revenue collected until the task is completed. It is considered a current liability, which must be paid during the current accounting year.

Comparison Table Between Accounts Receivable and Unearned Revenue

Parameters of ComparisonAccounts ReceivableUnearned Revenue
MeaningFor services already provided but not yet paid for, invoices are sent.Customers who have made in-advance payments on their accounts
NatureAn asset to a company is accounts receivable, evidence of future revenue.It is a liability for a company since it is evidence of future work, representing unearned revenue.
TreatmentWhen a company’s balance sheet is prepared, it is classified as current assets.When money is received, it is documented in the balance sheet, and when cash is received in the form of services, it is reported in the income statement.
ExamplesAmong the types of accounts receivable are credit sales invoices and EMIs.Unearned revenue includes things like advances and prepaid rent for the landlord.
BenefitsIt boosts the liquidity of a company and its value as a result of this.It raises the amount of cash available to a firm, which can be utilized to fund its operations.

What is Accounts Receivable?

Accounts receivable are those accounts for which a company has given products and services or completed work that has been agreed upon by the payer but has not yet received payment. Because the corporation will receive cash to settle these accounts, they are classified as current assets. Using the net sales to accounts receivable ratio, you may determine how much money you have in your bank account. Businesses use it to calculate and communicate their financial status to investors and other interested parties.

A well-run business relies heavily on its Accounts Receivable department. While not all payments are made immediately, the company cannot afford to lose essential clients prepared to pay their debts later. Those who have purchased goods or acquired services on credit are legally obligated to pay off their outstanding balances, which are recorded in accounts receivable until the balance is paid in full. Customers who have purchased goods or acquired services on credit are obligated to pay off their outstanding balances. A timely receipt of payment results in recording income on the financial statement; otherwise, the payment is recorded as a bad debt and documented as a negative entry on the financial statement.

Accounts receivables include subscriptions that have been offered, EMI and credit sales that have been made, and assets that have been offered for rent. They are made public after the fiscal year and their overall financial situation and performance.

What is Unearned Revenue?

If money has been collected, but no work has been done, it is unearned revenue. Payments to a company or an individual are made due to a transfer of value between the parties. One party delivers goods or services that the other party requires, and a price is agreed upon, with the doer receiving payment from the other party. In some cases, these payments may not be made at the time of the job but may be negotiated to be made in advance of the activity; in these cases, the prices are recorded as unearned revenue.

Even though unearned revenue reflects a receipt in advance, it remains a liability for a company because it now has a legal obligation to perform the duty that it had previously pledged to do. On the other hand, the company benefits since the money acquired in advance could be used to further the company’s goals that involve the use of money.

Delayed revenue is another term for unearned revenue. Even though payments have been received, it is considered revenue in pure accounting terms only once a contract has been completed. At this point, it is reflected in the income statement. Unearned revenue for an accounting business can include subscription services, pre-booking transactions, rent collected in advance, and other similar items.

Main Differences Between Accounts Receivable and Unearned Revenue

  1. When it comes to businesses, Accounts Receivable and Unearned Revenue are both considered current assets and liabilities, respectively.
  2. Amounts owed are recorded in Accounts Receivable because items have been given or work has been completed. Amounts received in advance that aren’t yet recouped are known as “unearned revenue.”
  3. Accounting for accounts receivable and unearned revenue is done in the cash flow statement while accounting for earned revenue is done in the income statement.
  4. The reduction of the accounts receivable turnover ratio occurs due to increased reports receivables, whereas the decrease in working capital occurs due to unearned income.
  5. Since businesses are profit-oriented operations, unearned revenue accounts are more readily established than accounts receivables, subject to default risk.

Conclusion

Because most businesses allow a significant amount of their sales and purchases to be made on credit, accurate accounting for time-sensitive transactions is a critical duty for any accounting company. With the accrual idea, accounting records payments that must be made or received in the future, as well as labour that must be done or has been completed in advance for a client, are created.

Accounting for accounts receivable is straightforward because it can be quickly converted into cash. As a result, it is classified as a very liquid or current asset, whereas accounting for unearned revenue is complicated since it has to be paid off quickly.

References

  1. https://books.google.com/books?hl=en&lr=&id=xj_4duzuNyEC&oi=fnd&pg=PR7&dq=Accounts+Receivable+and+Unearned+Revenue&ots=2zKCHTpFnJ&sig=Bet6c3oexz_C2-vs8Edki2OJzCQ
  2. https://www.sciencedirect.com/science/article/pii/S0278425409000908