what is unearned revenue 
unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered it can be thought of as a prepayment for goods or services that a person or company is expected to supply to the purchaser at a later date as a result of this prepayment the seller has a liability equal to the revenue earned until the good or service is delivered this liability is noted under current liabilities as it is expected to be settled within a year unearned revenue is also referred to as deferred revenue and advance payments paige mclaughlin investopediaunderstanding unearned revenueunearned revenue is most common among companies selling subscription based products or other services that require prepayments classic examples include rent payments made in advance prepaid insurance legal retainers airline tickets prepayment for newspaper subscriptions and annual prepayment for the use of software receiving money before a service is fulfilled can be beneficial the early receipt of cash flow can be used for any number of activities such as paying interest on debt and purchasing more inventory recording unearned revenueunearned revenue is recorded on a company s balance sheet as a liability it is treated as a liability because the revenue has still not been earned and represents products or services owed to a customer as the prepaid service or product is gradually delivered over time it is recognized as revenue on the income statement here s an example if a publishing company accepts 1 200 for a one year subscription the amount is recorded as an increase in cash and an increase in unearned revenue both are balance sheet accounts so the transaction does not immediately affect the income statement if it is a monthly publication as each periodical is delivered the liability or unearned revenue is reduced by 100 1 200 divided by 12 months while revenue is increased by the same amount unearned revenue is usually disclosed as a current liability on a company s balance sheet this changes if advance payments are made for services or goods due to be provided 12 months or more after the payment date in such cases the unearned revenue will appear as a long term liability on the balance sheet unearned revenue reporting requirementsthere are several criteria established by the u s securities and exchange commission sec that a public company must meet to recognize revenue if these are not met then revenue recognition is deferred 1according to the sec there must be collection probability or the ability to make a reasonable estimate of an amount for the allowance for doubtful accounts completed delivery or ownership shifted to the buyer persuasive evidence of an arrangement and a determined price 1example of unearned revenuemorningstar inc morn offers a line of products and services for the financial industry including financial advisors and asset managers many of its products are sold through subscriptions under this arrangement many subscribers pay upfront and receive the product over time this creates a situation in which the amount is recorded as unearned revenue or as morningstar calls it deferred revenue at the end of the second quarter of 2020 morningstar had 287 million in unearned revenue up from 250 million from the prior year end the company classifies the revenue as a short term liability meaning it expects the amount to be paid over one year for services to be provided over the same period morningstar quarterly reportunearned revenue can provide clues into future revenue although investors should note the balance change could be due to a change in the business morningstar increased quarterly and monthly invoices but is less reliant on upfront payments from annual invoices meaning the balance has been growing more slowly than in the past 