– Payments Received in Advanced
When selling goods or services, it is common to receive payments in advance from customers.
You've seen that this increases our assets, namely cash and liabilities, that is the obligation to provide
The specific account we use to record the liability is called unearned revenue or deferred revenue.
This can potentially be confusing, because the word revenue in the name seems to indicate that it's a
revenue account. It isn't.
Once liability is recorded, it will be reduced over time as the revenue is earned by delivering the product
Once again, the name of this liability account is unknown revenue or deferred revenue.
Suppose Cardullo's sells a customer a gift card for $100. This gift card transaction is an example of
deferred revenue. Cardullo's has received $100 from the customer, but Cardullo's has not yet earned the
revenue for the sale because the store still has the obligation to provide $100 worth of goods in the future
when the customer returns and redeems the gift card.
Cardullo's will need to record the receipt of $100 for the sale of a gift card.
To record this journal entry,
Cardullo's will first make a debit to cash for $100.Cash is an asset, and assets increase with a debit.
So this debit reflects the fact that Cardullo's now has $100 more in cash.
For the second half of the journal entry, Cardullo's will record a credit to deferred revenue for $100.