Unearned revenue is the traditional name for deferred revenue: a liability for cash a business has received before it has delivered the goods or services it owes. Under the US revenue standard ASC 606 and its IFRS counterpart, IFRS 15, the same balance is called a contract liability.
How unearned revenue is recorded
Receiving cash early does not mean the business has earned it. Until it performs, it owes the customer either the promised goods and services or a refund, so the amount is recorded as a liability. Under the revenue recognition rules, revenue is recognized only as the obligation is satisfied.
Suppose a software company sells a one-year subscription for $1,200 on January 1 and receives the cash that day. It debits Cash $1,200 and credits Unearned Revenue $1,200. At the end of each month it records one of its adjusting entries, a debit to Unearned Revenue and a credit to Subscription Revenue of $100. By June 30, $600 has been earned and $600 remains as a liability. By December 31 the whole amount has become revenue.
Common examples include magazine and software subscriptions, airline tickets sold before the flight, gift cards, annual maintenance contracts, rent received in advance and an advance from customer on a custom order. Amounts expected to be earned within a year are shown among current liabilities, and the rest as noncurrent. Analysts of subscription businesses watch the balance closely, because growth in unearned revenue often signals future revenue already secured.