Season passes, deposits, subscriptions — released by time or by work

◈ 9 cards

Release unearned revenue by the fraction of time elapsed or work done, and handle the alternative where the receipt was first booked as revenue.

The mirror of the prepaid

Unearned revenue is a prepaid seen from the other side: the customer paid first, and the company owes performance. As the performance is delivered the liability is released into revenue. Two bases: by time elapsed, when the service is spread evenly over a period (a season pass, a subscription, a retainer); by work done, when it is a countable block of acts (ten sessions, a deposit against a job).

Worked example — Northlake's passes

Northlake holds $30,000 from November and $24,000 from 5 December, both for passes covering 1 December to 31 March — four months. At 31 December one month of four has been skied:

$Earned = 54, 000 \times \frac{1}{4} = 13, 500$

Dec 31  Unearned Revenue                 13,500
            Service Revenue                        13,500
        One month of four-month season passes earned.

The debit is to the liability — it is being reduced — and the credit is to revenue. Unearned Revenue is left at $54, 000 - 13, 500 = 40, 500$ : three months of skiing still owed, and that is the balance-sheet liability at 31 December. Debiting Service Revenue and crediting Unearned Revenue is the wrong direction; it would reduce revenue and increase the debt.

Kettle Creek's deposit, by work. A patient paid $2,000 in advance for orthodontic work; by year end $1,200 of the work has been done. Dr Unearned Revenue 1,200 / Cr Service Revenue 1,200 — not the full 2,000, because 800 of work is still owed.

The alternative first recording

As with prepaids, a bookkeeper may credit revenue on the day the cash arrives; the adjustment then runs the other way, moving the unearned portion out of revenue into the liability. Georgian Bay Quarterly Inc., a magazine publisher, received $9,600 on 1 October for twelve-month subscriptions and credited Subscription Revenue for all of it. At 31 December three issues of twelve have been delivered — 2,400 earned — and nine months, 7,200, are still owed:

Dec 31  Subscription Revenue              7,200
            Unearned Revenue                        7,200
        Nine months of subscriptions unearned at year end.

After the entry, revenue holds 2,400 and the liability 7,200 — the same result as if the liability had been credited first. The trap is transferring the 2,400 (the earned part) instead of the 7,200 (the unearned part): ask which account is holding too much, and move that.

Non-refundable is not earned

A season pass is non-refundable, and a student sometimes argues the whole 54,000 should be revenue at sale because the cash can never go back. But revenue is earned by performing, and Northlake has not yet groomed four months of trail. Refundability affects the cash; it does not affect when the service is delivered.