This article reviews some common journal entries used when recording transactions related to Revenue.
Scenario 1:
If Cash has been received, but Revenue cannot yet be recognized (e.g.: product has not yet been shipped, service has not been rendered):
This journal entry creates a liability account called “Unearned Revenue”. Because we received cash for something they has not yet been earned, we must book this as a liability - we owe the client something.
Once the revenue can be recognized (e.g.: the services have been rendered/goods have been delivered):
This journal entry empties out the liability account “Unearned Revenue” and appropriately records the Revenue earned.
Scenario 2:
Revenue can be recognized, but no cash has been received:
This journal entry creates an asset “Accounts Receivable”.
Once Cash has been received:
This empties out the Accounts Receivable account and adds to the Cash balance.
Scenario 3:
A 5% discount is applied to Revenue earned.
Option 1:
This journal entry simply books the Revenue net of the 5% discount.
Option 2:
Revenue is first recognized at full price.
The discount is then deducted from the Revenue account and included in the contra-Revenue account, entitled "Sales Discounts". Note that a contra-revenue account is not an account that is shown on the entity’s Financial Statements. It is simply a placeholder account that the entity uses to keep track of their discounts.
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