Introduction
Hey readers! Welcome to our in-depth information on unearned income vs accounts receivable. These two phrases are sometimes confused, so we’re right here that can assist you perceive the variations and similarities between them.
In a nutshell, unearned income represents cash obtained upfront for companies but to be carried out or items but to be delivered. Accounts receivable, however, represents cash owed to an organization for items or companies already rendered however not but paid for.
Unearned Income: Definition and Examples
Definition
Unearned income, often known as deferred income, is a legal responsibility account that information advance funds obtained from clients. When an organization receives cost for future companies or merchandise, it creates an unearned income legal responsibility. This legal responsibility is then acknowledged as income over time because the companies are carried out or merchandise are delivered.
Examples
- Pay as you go insurance coverage premiums
- Journal subscriptions
- Present playing cards
- Season tickets
Accounts Receivable: Definition and Examples
Definition
Accounts receivable is an asset account that represents invoices despatched to clients for items or companies already supplied however not but paid for. When an organization sells services or products on credit score, it information an accounts receivable. This account is then lowered when the client pays for the products or companies.
Examples
- Invoices for merchandise offered
- Charges for companies rendered
- Utility payments
- Lease funds
Key Variations Between Unearned Income and Accounts Receivable
Timing of Transaction
- Unearned income is recorded when cost is obtained.
- Accounts receivable is recorded when items or companies are supplied.
Nature of Legal responsibility/Asset
- Unearned income is a legal responsibility as a result of it represents a future obligation to offer items or companies.
- Accounts receivable is an asset as a result of it represents a declare to future money circulate.
Recognition of Income
- Unearned income is acknowledged over time because the companies are carried out or merchandise are delivered.
- Accounts receivable is acknowledged instantly upon the sale of products or companies.
Desk Breakdown: Unearned Income vs Accounts Receivable
| Function | Unearned Income | Accounts Receivable |
|---|---|---|
| Timing of transaction | Cost obtained | Items/companies supplied |
| Nature of legal responsibility/asset | Legal responsibility | Asset |
| Recognition of income | Over time | Instantly upon sale |
| Examples | Pay as you go insurance coverage premiums, journal subscriptions | Invoices for merchandise offered, charges for companies rendered |
Conclusion
We hope this text has helped you perceive the variations and similarities between unearned income and accounts receivable. By understanding these two ideas, you may higher handle your organization’s money circulate and monetary statements.
In the event you discovered this text useful, you should definitely try our different articles on subjects resembling:
- Accrual Accounting vs Money Accounting
- Debit vs Credit score
- Steadiness Sheet vs Earnings Assertion
FAQ about Unearned Income vs Accounts Receivable
1. What’s unearned income?
Unearned income is cash obtained upfront for items or companies that haven’t but been supplied. It creates a legal responsibility till the products or companies are delivered.
2. What’s accounts receivable?
Accounts receivable is cash owed to a enterprise for items or companies which have already been supplied however not but paid for. It creates an asset.
3. How are they related?
Each unearned income and accounts receivable signify quantities owed to a enterprise.
4. How are they completely different?
Timing: Unearned income is obtained upfront, whereas accounts receivable is earned after companies are supplied.
Legal responsibility vs. Asset: Unearned income is a legal responsibility, whereas accounts receivable is an asset.
5. How does unearned income turn into accounts receivable?
When items or companies are supplied, unearned income is acknowledged as income. At this level, it turns into accounts receivable.
6. Why is it vital to trace unearned income?
Monitoring unearned income ensures that the right amount of income is acknowledged in the fitting interval.
7. How is unearned income handled on the steadiness sheet?
Unearned income is listed as a present legal responsibility.
8. How is accounts receivable handled on the steadiness sheet?
Accounts receivable is listed as a present asset.
9. What occurs if companies for unearned income usually are not supplied?
Unearned income have to be reversed.
10. What if a buyer pays after companies for accounts receivable are supplied?
The shopper’s accounts receivable steadiness is lowered.
