Explanation :
GAAP requires businesses to use the accrual basis of accounting. This means that all revenues are recorded when earned regardless of when the cash is actually received. In other words, a customer who buys a shirt on December 31 and pays for it on January 1 is considered to have bought the shirt on December 31. The retailer records a December sale. This concept also applies for customers who put down deposits on sales. Since the good or services haven't been delivered or performed yet, the company hasn’t actually earned the revenue. It records a liability until the company delivers the purchased product.In a nutshell :
- Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered.
- It is recorded on a company’s balance sheet as a liability because it represents a debt owed to the customer.
- Once the product or service is delivered, unearned revenue becomes revenue on the income statement.
- Receiving funds early is beneficial to a company as it increases its cash flow that can be used for a variety of business functions.
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