What is the difference between earned and unearned revenue? When using the accrual basis accounting method, revenue must be recorded as it is earned regardless of when payment is received.
For companies who charge and collect payments up front for services, revenue must be recognized on an accrual basis. This means if you collect an annual subscription fee up front, you must earn that revenue over the entire year.
Let’s use the example of Acme Corporation collecting an annual payment for their Software-as-a-Service (SaaS) product. They collect $12,000 at the start of the year. At the time they collect the money, all $12,000 is considered unearned. This is based on the accrual basis accounting method that says Acme can not recognize that revenue in it’s entirety until they have provided those services. The revenue can only be earned over time.
Each month the the life of the annual contract, Acme may recognize $1,000 of earned revenue. This is because they are providing a service to their customers each month for the entire year.
You can find an example of How To Calculate Deferred Revenue as well as other useful resources throughout this site. For more information on ProRata and how it can help you automate your revenue recognition tasks, head on over to our Product Features page.