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What Is Unearned Revenue?
What Is Unearned Revenue?
By
DANIEL LIBERTO
Reviewed by
THOMAS BROCK
Updated Nov 5, 2020
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.
KEY TAKEAWAYS
Unearned Revenue
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.
According 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.
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.