What type of account is unearned revenue?

Accrued income examples

The accrual principle is an accounting rule that establishes that transactions or economic events are recorded when they occur, regardless of the date of payment or collection.

The objective of the accrual principle is that the annual accounts of a company clearly reflect the equity, financial position and economic results achieved by the company in that period, allocating expenses and income to the period in which the annual accounts refer to and affect the same, regardless of the time of their collection or payment.

In the case of subsidies, it should be noted that when a subsidy is granted, the monetary collection of the subsidy takes place, but its allocation to the income statement should not be made until the subsidy is definitive: when the requirements established in the grant of the subsidy are fulfilled.

Non-accrual meaning

Companies relate revenues to expenses, i.e., they deduct expenses from revenues to determine the result for the period, preparing adjusting entries. These determine revenues in the period in which they are accrued and expenses in the period in which they occurred.

If collection is made in the period in which the service is rendered, there is no need to make adjustments. However, when the collection is made in a period other than that in which the service is rendered, the following adjustments must be made:

1. Accrued Income.- This is income earned but not recognized for accounting purposes, because payment is made later, the same that should be recognized as income in the corresponding period charged to accounts receivable, such as overdue rents and interest. (Rents and interest are accrued over time).

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2. Unearned or Deferred Revenue – This is generated when the company receives cash before the work is performed; the company should recognize the money received as deferred revenue or an advance payment, for example, when cash is received for rent or interest that is not due.

Which are accrued income

Resolution of February 10, 2021, of the Spanish Accounting and Auditing Institute (Instituto de Contabilidad y Auditoría de Cuentas), which establishes rules for recording, valuation and preparation of the annual accounts for the recognition of revenue from the delivery of goods and services.

The General Accounting Plan (PGC) approved by Royal Decree 1514/2007, of November 16, 2007, includes in its second part the recording and valuation rules that develop the accounting principles and other provisions contained in the first part relating to the Conceptual Framework of Accounting. This resolution constitutes the regulatory development of the criteria for the recognition of income from the delivery of goods and the rendering of services.

For this purpose, the third final provision of Royal Decree 1514/2007, of November 16, 2007, empowers the Instituto de Contabilidad y Auditoría de Cuentas (ICAC) to approve, by means of a resolution, mandatory rules that develop the PGC and its complementary rules, in particular, in relation to the recording and valuation rules and the rules for the preparation of the annual accounts.

Unearned income which is

It may be that the company, even without having rendered a certain service, collects it; or that, without having received a certain service, it pays for it. In such cases, the company collects unearned income and pays an unearned expense. Despite this circumstance, it records them for accounting purposes:

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On the other hand, collected and unearned income is recorded in accounts 485, “Prepaid income”, and 585, “Interest collected in advance”, which are liabilities. The distinction between these accounts is that account 585 only deals with interest on loans granted by the company.

In this way, the advertising expenses accrued in fiscal year X0, which reflect the advertising services received up to the date indicated, i.e. those corresponding to the period from March 1 to December 31, X0, are included in the calculation of the result for fiscal year X0. For accounting purposes, this will be recorded:

On the other hand, as of December 31, “MAJO, SA” has not yet benefited from the advertising of January and February X1. These are expenses not accrued in fiscal year X0, and therefore do not affect the determination of the result for fiscal year X0, hence these expenses are temporarily derecognized. The closing balance sheet shows this circumstance, as the “Prepaid expenses” account appears on the assets side, indicating the existence of expenses paid but not accrued in fiscal year X0.

What type of account is unearned revenue?
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