How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.

Unearned revenue occurs when cash is obtained by the company as a payment from a customer before producing goods or rendering the services as promised to the customer. However, it is regarded as a prepayment for goods and services that will be conveyed at a future date.

Unearned revenue is an assumption made to show the obligation made to the customer to refund the assets received in advance in case of the nonperformance of the aforesaid contract, in turn earning the rights over the assets received. However, there might be an element of unrealized profit included in the liabilities. When the unearned revenues are grouped as such, it is ignored fact that the amount of unrealized profit holds uncertain and usually not material in relation to the total obligation.

• The amount paid by the company for insurance in advance.
• The amount paid by the company for services in advance.
• The amount paid by the company for expenses in advance.