I will be grateful for your help on this topic - I understand that it is extremely simple, but somehow I don’t see the reasoning behind this formula.
Bookings = Revenue + Change in Unearned Revenue
For example, quarter 1 revenue is 563, quarter 1 unearned revenue is 577, and previous quarter’s unearned revenue was 632.
To compute cash collections (bookings) I have to do the following:
563 + 577 - 632 = 508
I don’t see what this equation tells me: if this quarter’s revenue is 563 (a recognized one, part of it might have been non-cash, but we don’t know that) and also 577 was recorded as unearned revenue, this would be recorded as (I am omitting the debit part for now)
Cr Revenue 563
Cr Unearned revenue 577
The beginning balance of unearned revenue was 632, which means that Unearned revenue account has been debited (decreased) by 55 during the period and now has an ending balance of 577, and this shall be recorded as follows:
Dr Unearned revenue 55
Cr Revenu 55
Are all above assumptions correct?
I don’t understand why to compute bookings I have to subtract this change of unearned revenue of 55 from the revenue according to formula: previous quarter unearned revenue was 632, which is higher than this quarter’s unearned revenue of 577, hence according to the formula I have to subtract the difference of 55 from the revenue.
Thank you in advance for your explanations and help!
Unearned revenue is a cumulative account. If the unearned revenue is down quarter over quarter, some of that revenue was realized in the following period (or more was realized than was added to the account). Think about a magazine subscription. You pay $120/year prior to the magazine sending you an issue. The company may record unearned revenue of +$120. The following month, they send you a copy. Revenue (earned) +$10, unearned revenue account is now $110. Hope that made sense!
I am not sure I follow the example. But read PreDR’s post carefully. It may help and is accurate.
Your first Journal Entry (CR Rev 563 CR Unearned Rev of $577) cannot be correct. The $563 of revenue for the period has at least two components: what was “earned” of the beginning balance of $632 (that $632 in cash was collected in an earlier period) and any revenue originated and earned in the current period.
I do agree with your cash collections equation, though, assuming there are no Accounts Receivable or other complicating factors.
the reason why u need to subtract the changes in unearned revenue account from the revenue account is because for unearned revenue, basically, already u receive money for service which u have not perform YET. It means the cash is already in:-
I.e. Dr Cash | Cr Unearned Revenue
To compute cash collection, the basic formula: Revenue +(-) decrease (increase) in account receivable. But the Revenue account has included some cash that was PREVIOUSLY RECEIVED (Dr Cash | Cr Unearned Revenue). So in order to compute the current quarter’s cash collection, u need to subtract cash that have been collected in previous quarter to arrived the true cash collection in the current quarter.
Thank you very much for your answer. Most likely I have not made myself clear - I completely understand how to recorde Revenue and Unearned revenue, no problems with understanding these guys ) My problem is with Cash collections(bookings): I don’t understand why the amount of cash collections (bookings) equals to Revenue (part of which might be noncash) minus Change in Unearned Revenue (part of which might be cash received in advance); I don’t see how these are related, if we have no idea how much of the recorded revenue is cash.
Oh, I see, but still not completely. Thank you so much. Please, let me know if I understand this correctly:
yes, indeed, once a company gets cash, for example, 600 but has not yet provided goods/services, it has not yet realized the revenue, hence, yes, we record Dr Cash 500 and Cr Unearned revenue 600 liability. At the same time the company has some earned Revenue with the beginning balance 300, part of which might be non cash, stored in Accounts Receivables, but nothing is said about these AR in the formula.
At the end of the period the company has realized some of the Unearned Revenue 100, and hence the difference between the beginning 600 and ending balances of 500 of Unearned Revenue account is now added to the realized Revenue account by Cr Revenue 100, so the ending balance of Revenue is 400; but this difference of 100 has already been paid in cash sometime during the period. So, if the ending balance of Unearned Revenue account is smaller than the beginning one, then this difference, for which cash has been received previously, is already part of the realized Revenue account; therefore Cash collections should be equal to Revenue - AR, but not change in Unearned Revenue. I am sorry I still miss the point the formula makes.
Your concept is correct, but you need to understand that, revenue is a transaction (Income Statement), not balance (Balance Sheet).
I.e, your revenue last year is $1mil, but this doesn’t mean you Income statement start with $1mil this year, but rather, u start with 0.
So in the last period, you have collected cash for work that you have not done yet. (Dr Cash, Cr unearned revenue)
In this period, when you have perform your work, you unleash the $100 to revenue (Dr unearned revenue $100, Cr revenue $100).
BUT, the cash for this revenue that you have recorded in the CURRENT PERIOD, has already been COLLECTED in prior period.
So, if you calculate the the cash collection from customer [Revenue +(-) decrease (increase) in account receivable] for this period without deducting the $100 that you have received in the prior period, u will double counting (overstate) your current period cash collection by $100.