How to record unearned service revenue

Overview

In business, the service company usually receives advance payment for the service that it will perform in the future period. Likewise, the company needs to record this advance payment as an unearned service revenue in the journal entry to comply with the accrual basis of accounting.

Under the accrual basis of accounting, the company should only record revenue when it is earned. Hence, an advance payment for the service that the company has not performed yet should be recorded as unearned service revenue which is a liability instead of recording it as revenue.

Only when the service has been provided, should the revenue be recognized and recorded. In other words, the unearned revenue is recognized as revenue at the time the company performs the services it owes to the customer.

Record unearned service revenue

The company can record the unearned service revenue with the journal entry of debiting the cash account and crediting the unearned service revenue account.

Account Debit Credit
Cash $$$
Unearned service revenue $$$

Unearned service revenue account is a liability account, in which its normal balance is on the credit side. Likewise, this journal entry is made for the company to recognize the performance obligation that it needs to fulfill in the future period after receiving the advance cash payment.

When the company fulfills its obligation by providing the service to the customer, it can make the journal entry with the debit of the unearned service revenue account and credit of the service revenue account.

Account Debit Credit
Unearned service revenue $$$
Service revenue $$$

Unearned service revenue example

For example, on 28 December 2020, the company ABC receives a $5,000 advance payment from one of its customers for the consulting service that it will provide at the beginning of Jan 2021. The consulting service is expected to complete at the end of Jan 2021.

In this case, on 28 December 2020, the company ABC needs to record the $5,000 as unearned service revenue with the journal entry below:

Account Debit Credit
Cash 5,000
Unearned service revenue 5,000

In this journal entry, both total assets and total liabilities on the balance sheet increase by $5,000.

At the end of Jan 2021, after the company ABC has fulfilled its obligation by providing the consulting service to its customer, it can make the journal entry to transfer the $5,000 amount in the unearned service revenue account to the service revenue account as below:

Account Debit Credit
Unearned service revenue 5,000
Service revenue 5,000