Suppose a company receives $12,000 for an annual subscription of their service.
At month 0, the accounting equation gets $12,000 in cash for assets and $12,000 in unearned revenue as a liability.
I am confused about how the accounting equation looks like at month 1 where we have converted $2,000 of the unearned revenue into earned revenue. Is earned revenue thought of as a contra account for liabilities?
Earned revenue is not a balance sheet account. When the goods/services are rendered, the unearned revenue liability account on the balance sheet is reduced and the income statement revenue item is increased.
At month 1, the liability decreases down to $10,000 but this throws off the balancing equation Assets = Liabilities + Equities since cash is still the same but liabilities are now down.
For full disclosure: This is one of the first times I am seeing accounting so bear with me if I am not understanding this right away.
As Mamba says, Unearned Revenue decreases and (earned) Revenue increases.
Revenue is closed out to Retained Earnings, so R/E increases; that’s what rebalances the accounting equation: it becomes equity.
Ah it goes into equity, got it.Thanks!
You’re welcome.