What should be done with unearned revenue before it is earned?

When a business receives payment for goods or services that have not yet been delivered or performed, this payment is referred to as unearned revenue. At this stage, the business has an obligation to provide a good or service in the future, which is why it is initially recorded in a liability account. This liability indicates that the company owes something to the customer.

Recording unearned revenue as a liability reflects the company's commitment to fulfill its obligations. Once the goods or services are delivered and the revenue is actually earned, the company then makes an adjusting entry to recognize the revenue, transferring the amount from the liability account to the revenue account. This alignment with the revenue recognition principle ensures that income is properly accounted for in the period in which it is earned.

This process maintains the integrity of the financial statements, ensuring that liabilities are accurately depicted and that the revenue reported reflects the actual performance of the business.