When does cash received from a customer become unearned revenue instead of revenue?
I always want to credit revenue when cash comes in, but the answer key keeps saying unearned revenue.
Cash received before the company has performed the promised service is generally recorded as a liability. The company owes future performance, so the credit is unearned revenue. Revenue is recognized as the performance obligation is satisfied.
Example: Elm Ridge Training receives 12,000 on July 1 for a four-month training package beginning August 1. On July 1, Elm Ridge records cash and unearned revenue. At August 31, after one month of training, it recognizes 3,000 of revenue and reduces unearned revenue by the same amount.
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