Chapter 2
Linking Personal Accounting to Business Accounting
34
Recording Revenue
In business accounting, as in personal accounting, accrual-based accounting is used to record
transactions. Revenues are recorded or recognized when they are earned regardless of when cash
payment is received from the customer. Cash received for selling services or products is a timing
issue, and cash for revenue can be received from customers at three different times.
1. Received before services are performed
2. Received when services are performed
3. Received after services are performed
In all cases, equity will increase when revenue is recognized.
Cash Received before the Service is Performed
When a customer pays a business for services before they are performed, it is known as a
customer
deposit
. A number of different types of businesses require deposits or prepayments for their
services. Examples include banquet halls (hall rental fees), health clubs (memberships), magazine
publishers (subscription dues) and insurance companies (insurance premiums). In each case, the
business receives cash up front and provides a service at a later date.
Since services have not been performed at the time the cash
is received, service revenue cannot be affected. Instead, the
business has an obligation to provide services in the future.
You will recall that an obligation of a business is a liability.
Thus, a new liability account known as unearned revenue
must be used.
Suppose a business receives a deposit of $1,100 from a
customer one month before services must be provided.
Figure 2.9 illustrates the impact on the accounts of the
business at the time the customer paid for the services (one
month in advance). The prepayment by the customer is a
liability for the business (unearned revenue) because the
business now has an obligation to provide services to the
customer.The payment is essentially held in trust on behalf
of the customer. At this point, there is no impact on equity
because even though cash is received, revenue is not recognized since no work has been completed.
If the business fails to provide the services, they must return the deposit to the customer.
It is only when work is completed in the next month that revenue can be recognized.The transac-
tion to record this will be covered in a later chapter.
2
ASSETS
BALANCE SHEET
LIABILITIES
CASH
ACCOUNTS
RECEIVABLE
PROPERTY, PLANT
& EQUIPMENT
PREPAID
EXPENSES
OFFICE
SUPPLIES
ACCOUNTS
PAYABLE
UNEARNED
REVENUE
BANK
LOAN
+ $1,100
+ $1,100
OWNER’S EQUITY
OWNER’S
CAPITAL
OWNER’S
DRAWINGS
No change in owner’s equity
Receive
prepayment
from customer
______________
FIGURE 2.9
