Extended service contracts for appliances and electronics sell for a specific price, cover specific repairs and have a specific time frame within which you can get free or reduced price service. Deskera is an award-winning cloud-based accounting software that integrates directly with your business bank account. When revenue is recorded in the general ledger, there is a certain way to do it. This is because the revenue received ends up on the income statement, and the cash is on the balance sheet of the organization’s financial reports. Let’s assume, for example, Mexico Manufacturing Company receives $25,000 cash in advance from a buyer on December 1, 2021. The agreement pertaining to this transaction stats that the company must manufacture and provide goods to the buyer on January 15, 2022 against the prepayment received from him on December 1, 2021.
The amount of $25,000 will essentially appear as liability in the books of Mexico Company until it manufactures and actually delivers the goods to the buyer on January 15, 2022. First, recording customer deposits as revenue doesn’t accurately reflect the company’s financial position. For example, say you collect a $5,000 deposit from a customer in December and recognize the full payment as revenue.
Example of Realized Vs. Realizable Revenue
Unearned revenue is not an uncommon liability; it can be seen on the balance sheet of many companies. In terms of accounting for unearned revenue, let’s say a contractor quotes a client $5,000 to remodel a bathroom. If the contractor received full payment for the work ahead of the job getting started, they would then record the unearned revenue as $5,000 under the credit category on the balance sheet. A business owner what types of industries have unearned revenue can utilize unearned revenue for accounting purposes to accurately reflect the financial health of the business. This type of revenue, for one, provides an opportunity to help small businesses with cash flow and working capital to keep operations running and produce goods or provide services. As the company performs the service or delivers the goods, it deducts the appropriate amount from the unearned revenue account.
If you don’t provide the agreed-upon services, you’ll be obligated to refund Customer A’s money. A company figures its profit or loss over time by subtracting expenses from revenue. For tax purposes, the relevant time period is the tax year or other fiscal year approved by the Internal Revenue Service. The two major accounting methods for computing profit or loss are the cash method and the accrual method.