How should unearned revenue be adjusted when it is earned?

When unearned revenue is earned, it reflects the completion of the obligation associated with the revenue that was initially recorded as a liability. The proper accounting treatment for this situation involves removing the unearned revenue from the balance sheet, where it has been recorded as a liability, and recognizing it as earned revenue on the income statement.

By debiting the unearned revenue account, you are reducing the liability since the obligation has been fulfilled. This adjustment indicates that the service has been provided or the product has been delivered. Consequently, you then credit the revenue account to reflect the increase in earned revenue, which will ultimately affect the income statement positively.

Recognizing revenue in this manner aligns with the revenue recognition principle, ensuring that revenues are recorded when they are actually earned, rather than when cash is received. This approach provides a clear and accurate view of the financial position and performance of the company during a specific accounting period. Thus, this method of adjustment is essential for accurate financial reporting.