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shakedown · Nov 12, 2009, 11:29 PM

What are the journal entries required for unearned revenue that includes expenses and income. For example, a customer prepays for service that will have unknown expenses associated with the service. So far I have the following:

Dr Cash 25,000.00
Cr Unearned revenue 25,000.00
To record the initial sale

The unearned revenue becomes realizable three months after the prepayment because all services were rendered. Expenses incurred during this three months totaled 18,000.00. Expenses do not have the ability to be forecasted. What are the adjusting entries necessary when the services are rendered and the job is complete?

morgaine300 · Nov 14, 2009, 03:17 AM

What kind of revenue? Is this just a case of plain-old revenue that happened to be prepaid?

In that case, if you have expenses incurred that are associated with that revenue, seems to me you've done something to earn part of the revenue, no?

Further, you need to learn the difference between recognizing and realizing. You aren't going to realize the revenue in three months because you already have it. Realizing it means getting it. Recognizing means recording it.

shakedown · Nov 14, 2009, 04:28 AM

Morgaine, thank you for your response. You are correct, the revenue is recognized (instead of realized) three months after the prepayment. At the time of the prepayment, no part of the revenue has been earned.

How can I record the adjusting journal entry or entries after the revenue is recognized?

morgaine300 · Nov 16, 2009, 11:46 PM

Dr. the unearned account and cr the revenue account. But I still don't understand why you have expenses involved if you haven't earned part of it during those three months. If you're doing part of the work, then recognize part of the revenue. (Actually, the important time to make sure all accounts are correct - earned part recognized and unearned part still in the liability - is for your year-end statement.)