The payments ecosystem gives businesses and their customers a huge variety of ways to make and receive payments, opening up a wealth of opportunities for growth and new ways to attract customers and build loyalty.
Unearned revenue is a byproduct of this diverse payments landscape, and refers to money that a business has received for a product or service that they haven’t yet delivered to their customer. This is usually in the form of a subscription or advance payment.
This unearned sum can play a vital role in maximizing revenue in the long-run and boosting cash flow for small businesses.
In this article, we’ll help you understand unearned revenue, provide examples of how it works in commerce, and explain how it benefits your business and how you can take advantage of it by offering subscriptions with Checkout.com.
Also known as advanced payments or deferred revenue, unearned revenue is simply when a business receives prepayment for goods or services they haven’t yet provided.
Until you’ve delivered the goods or service, you record the sum as a liability on your balance sheet that’s equal to the revenue earned. Once delivered to the customer, you can change the unearned revenue to revenue on your income statement.
Unearned revenue serves a function in both the offline commerce and ecommerce worlds, but is most commonly found in:
As stated earlier, until the goods or service paid for have been provided, unearned revenue remains a liability. This revenue is usually considered a short-term liability, but if it takes more than a year to deliver the service in full, it should be recorded as a long-term liability.
Let’s look in a bit more detail at its journey from liability to asset in your accounting.
It’s essential to record this revenue correctly. If you were to enter the amount as an asset rather than a liability, your profit would be overstated for the accounting period, resulting in an imbalance in your books. At best, this inaccuracy could cause a mild headache and poorly-informed decision-making. At worst, you could be accused of cooking the books and face legal action.
Taking prepayments in the form of installments or subscriptions has numerous benefits for businesses.
For example, one of the small business community’s most persistent issues is late payments from suppliers, which can strain cashflow and delay growth. Advance payments give businesses a way to redress this balance. By taking an injection of credit from their customers in exchange for the future provision of a service, businesses get upfront capital that can be used to fuel growth plans and improve their offering.
Taking installment payments can also benefit both you and your customers. You don’t get a payment in full upfront, but you do get to attract customers and receive cash that you wouldn't otherwise have if those customers couldn’t afford to pay for your services. Likewise, by paying in installments, your customers have a simple and affordable way to boost their purchasing power.
Improve your cashflow, reduce churn and grow your business by offering subscription payments with Checkout.com.
Our subscription payment services come with a wealth of tools and benefits that can help you optimize your payments and grow revenue. That’s because Checkout.com’s unified payment solution enhances your decision making with better data and business analytics. You get granular data on pricing and billing schedules, which you can use to refine your subscription model, increasing authorization rates and growing revenue, all while improving security and cutting compliance costs.
Find out more about Checkout.com’s subscription solution.