Why is unearned revenue considered a liability?

March 11, 2011
By theinsurancepedia

When a company refers to “unearned revenue,” it is often considered a liability because it is merely an estimate of what a company hopes to make in the future. If a business starts treating this number like an actuality instead of just an estimate, it can project earnings incorrectly and cause problems for business planning.

Unearned revenue is also revenue which has not been taxed. Businesses can discuss numbers and estimate profits when having meetings, but they should never document these numbers as actual numbers. People can make mistakes and accidentally write these numbers onto important forms. Actual numbers are numbers which have had taxes removed and costs deducted from. Estimates are merely speculations.

This is what makes unearned revenue such a liability. When people start talking about it, others might accidentally interpret it as actual present-day earnings. Whenever referring to any form of revenue which has not yet been earned, anyone at a business should clearly indicate that it is just an estimate.

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