The notion of unearned revenue

The notion of unearned revenue

Dec 24, 2019 Accounting Blog by an

Every accountant should know, “What is unearned revenue?”. Until 1984, in the UK, it was believed that it is an investment revenue because it is more permanent than earned revenue. It does not depend on the work of the taxpayer, should be taxed at a higher rate than earned revenue, which was done by additional taxation of investment income, the rate of which is 15% higher than the normal rate of income tax. Currently, earned and unearned revenue balance sheet is taxed in the UK at a flat rate.

Unearned revenue balance sheet

Is unearned revenue a current liability? Undoubtedly, yes, it is. Unearned revenue on a company’s balance sheet is generally treated as a current liability and is expected to be subsequently charged to income during the relevant reporting period. Now, you know, “What type of account is unearned revenue?”. It is quite easy to understand, even for a beginner accountant. 

Most unearned sources of revenue are not taxed on wages, and all sources of unearned revenue are not taxed on employment, such as Social security and Medicare. It is, therefore, essential that those producing unearned revenue understand where that revenue comes from and how each source is taxed.

What type of account is unearned revenue?

The most common type of unearned revenue is revenue derived from interest and dividends. Most people are involved in some investment, be it debt or capital. If, for example, a person invests in a dividend-paying company such as Disney, they are likely to receive a dividend payout every quarter.

Less common forms of unearned revenue include gifts, prizes, inheritances, and other unearned income. Any time someone gives money to another person, wins a prize pool in a contest or lottery, inherits money from a deceased relative, or receives alimony or workers, it is considered unearned revenue. This is because the money was received without the participation of active work or business activity. Each of these situations has unique rates of unearned revenue tax.

The types of unearned revenue

American businessman and entrepreneur Robert Toru Kiyosaki in his world bestseller “Rich Dad, Poor Dad” wrote about the basic principle of a rich man the following: “Rich people do not work for money: they make money work for themselves.” 

In economics and law, it is believed that earned revenue is money that a person has earned, that is, performed certain actions to obtain them. If the entrepreneur has successfully invested money and made a profit – forced the money to work for himself, then his income will be attributed to unearned. Thus, the first group of unearned revenue is earnings from investing money, interest on debt obligations, which are paid by debtors to creditors, and so on.

The second type of unearned revenue – the so-called “random” money, the receipt of which depends on chance or luck. Of course, this group will include money for a successful bet, winning at the casino, and so on. After all, to win in the casino, you do not need to do any work. The actions of the players in assessing the current situation, of course, can not be called work.

Among other types of unearned revenue, according to the writings of most economists, there is a profit from stock trading on the Forex market and earnings on speculative transactions. Yes, the trader analyzed the market to make the transaction profitable; the trader risked his own money. Still, he did not create material or spiritual values, so his income in economic theories is considered to be “unearned”.

In Britain, until the nineteenth century, unearned revenue was taxed at a higher rate of interest, an attempt by the government to equalize the position of the poor with the economic elite. However, the government soon realized that legislation on unearned revenue had no effect and stopped trying to raise the tax rate.