Understanding and determining the correct account for accounting is always a matter that accountants are interested in and learn about. One of the accounting contents that accountants often confuse about the nature of accounting is distinguishing the difference between "Unearned Revenue" and "Prepaid by Buyers".
To provide a thorough understanding before accounting as well as improve the accuracy of financial statements, this article will clearly show the difference.
1. Unearned revenue – Account 3387
Unearned Revenue: Reflects the current amount and the increase or decrease in unrealized revenue of the enterprise during the accounting period and includes revenue received in advance for one or more accounting periods... Do not record in this account the following items:
- Money received in advance from buyers for which the enterprise has not yet provided products, goods or services;
- Uncollected revenue from asset leasing and multi-period service provision.
When the business has handed over its assets (eg house for rent), its source of capital (for example, lending capital) to customers and partners and at the same time received money in advance (such as rent, interest) for the use of these assets and capital in many periods, this must be recorded in unrealized revenue.
For example: Company A leases assets to company B. Party A has delivered the assets to Party B and received 2 years of rental payment in advance from Party B. Party A's accountant records it in account 3387 - "Unearned revenue".
2. Buyer pays in advance – Account 131 (Credit balance)
Buyer pays in advance: Reflects the amount of money the business receives in advance for the goods and services it will sell or provide in the future. When the business receives this amount, the ownership of the goods and services has not yet been transferred to the buyer, and the services provided have not yet been transferred, so revenue has not yet been recorded.
Therefore, the nature of the customer advance is a payable. In the future, if the unit does not sell goods as agreed, it must refund the amount received in advance by the customer. And under the contract, the business must deliver goods and perform services in the future.
For example: Company A sells goods to company B. Party A has received the advance payment from Party B but has not yet delivered the goods. Party A's accountant records the credit in account 131 - "Buyer pays in advance".
3. Distinguishing features when choosing an accounting account
Here are two characteristics to distinguish accounting accounts:
- At the time of recording the cash receipt transaction, if the amount to be received relates to a transaction that has generated revenue but part of which the business has not yet realized.
=> Record as “Unearned Revenue”. Revenue generating transactions are transactions in which the business has transferred ownership of goods to customers or has completed services and transferred them to customers.
- At the time of recording the transaction of receiving money, if the amount to be received is related to a transaction that has not yet generated revenue, it means that the ownership of goods has not been transferred and the transfer of services has not been completed.
=> Record as “Buyer paid in advance”.
In the process of accounting, it is important for accountants to understand the exact nature of the arising transactions rather than only paying attention to the form of documents, thereby determining the appropriate terms and presenting the financial statements. most honest, most accurate. For any professional advice, please refer to Full accounting services We will work together to find the best solution for you.
