Unearned service income is income received by businesses in payment for services or products to be provided in the near future. This income, like all financial transactions, is recorded in the company’s income statement, which is a financial statement showing profits, losses and net worth over a specific reference period. The key to correctly posting unearned service revenue to a company’s income statement requires recognizing the need to reflect two corresponding postings for each financial transaction.
Income is generated through the regular business activities of a business. A service company can provide carpet cleaning, construction work, or legal representation. A sales company generates income through the sale of products. The revenue collection is offset by a decrease in assets, such as inventory or the value of services. Revenue from completed activities is recorded as revenue in the income statement. Unearned service revenue should be recorded, but it is not recorded as revenue in the income statement. Money received for services that were not provided is not considered real income until the income is earned.
The income statement, also called the income statement, shows a picture of a company’s performance over time. Business owners, employees, and investors use income statements to analyze and assess past and future business performance. The report provides corresponding postings for the receipt of income from business activities, such as the provision of services, and the expense for the costs of performing business activities. Costs can include overhead, inventory, salaries, interest on loans, and amortization. The net income and net loss totals reflect the profit and net worth of the business after balancing debits and credits.
Cash payments received for services that have not yet been provided are recognized as a liability. Unearned service revenue, also known as deferred revenue, is a debt of time and resources spent performing future service. The company is responsible for this debt. The payment is not included in the gross turnover of the business, which is reflected in the number called “top line” located at the beginning of the income statement. Unearned service income remains in the income statement until the work is actually performed, after which the cash payment is recorded as income, and the resources used to provide the service are listed as a business expense. .
A transportation company contracts to provide services to an after-school program for $ 24,000 and receives $ 12,000 as half the cost. The $ 12,000 of unearned service income is recorded as a liability in the income statement, and the appropriate portion is recorded as income after each month of service completed. Companies often create a separate category on the income statement for unearned income.
Biography of the writer
Gail Sessoms, grant writer and nonprofit consultant, writes about the issues of nonprofits, small businesses, and personal finance. She volunteers as a court-appointed children’s advocate, has training in social services and writes on issues important to families. Sessoms holds a Bachelor of Arts in Liberal Studies.