Difference Between Accounts Payable and Unearned Revenue

Accounts payable and unearned revenue are terms that are relevant in accounting. They are based on the accrual concept of accounting. In accrual accounting, the revenue and expenses can be recorded earlier. They are temporary accounts denoting provisions yet to be delivered. They are considered liabilities till it is given.

Accounts Payable vs Unearned Revenue

The main difference between accounts payable and unearned revenue is that accounts payable is to be paid in cash for an already received service or product. While unearned revenue is the revenue that a company or provider receives before delivering its service or product. A service or product is to be delivered in unearned revenue.

Accounts Payable and Unearned Revenue

Accounts payable is the amount a business owes to its vendors. There is a department for accounts payable that monitors the suppliers and pays them. Simply, it is similar to the bills that are paid at the end of the month in a household. Large businesses have automation solutions for accounts payable. In this process, the supplier provides the service and gives the invoice. The receiver will pay for it within a given period.

Unearned revenue is the income that a business gets before providing the service. It is considered a liability. The liability becomes an asset only when the service is delivered rightly. Small businesses can use the unearned revenue for the payments related to the project, ensuring cash flow.

Comparison Table Between Accounts Payable and Unearned Revenue

Parameters of ComparisonAccounts PayableUnearned Revenue
MeaningThe amount a business owes for a previously received product or service.The advance payment made by a client for a service or product to be delivered.
Time SpanUsually settled within a monthOften delivered within a year
Delivered inCashService or product
ExamplesPending invoices of materials in an enterpriseSubscriptions, pre-booked tickets, and prepaid rent
ProcessThe supplier has to provide with the invoice and the AP has to sanction the amount upon verificationThe service or product has to be delivered within the time limit

What is Accounts Payable?

Accounts payable is the amount that a company has to give for a service provided in the past. The company, after receiving the service or product from its creditors or suppliers, may not pay at that instant. Instead, there will be a general agreement on both sides about the payment. It is usually a short-term debt that is paid within a month.

It is called AP. It is an account in the general ledger. It is shown under the current liabilities section in a balance sheet. If the amount is not paid within the given time, the company is likely to be at the risk of default. 

The company to receive the payment marks it in their accounts receivable section. For managing a business ideally, the company must maintain its cash flow. When services or products are purchased on credit, the accounts payable increase. If the company is paying the accounts payable at a rapid rate and avoiding payment delays, the AP gradually decreases.

What is Unearned Revenue?

In simple terms, unearned revenue is the advance or prepayment that a company makes for a service or product that is not yet delivered. This is a liability for the company until the service or product is received. It is also called deferred revenue or advance payments, or prepaid revenue.

This mode of revenue is usually seen in subscription-based products and services which require advance payments. For instance, airline tickets, the annual subscription for an application, or prepaid insurance are all unearned revenue. This kind of revenue is marked in the company’s balance sheet as a current liability. Because the product or service is still due to the customer, the name deferred revenue is understandable.

Unearned revenue is beneficial for the seller as it helps in the cash flow while liability for the recipient. The seller or provider can use the money for the company’s interest. If the customer cancels their service or if the company is unable to cater to the needs of the customer, the unearned revenue is to be returned to the customer.

Only after providing the service or product the liability becomes a revenue. The unearned revenue is then earned by the provider. Unearned revenue is mostly used in accrual accounting. Rules are different for public companies that have unearned revenue. Usually, the services are fulfilled within a year. Thus, it is a short-term liability. However, if a service or product is not delivered within the time of a year, it is termed as a long-term liability.

Main Differences Between Accounts Payable and Unearned Revenue

  1. Accounts payable is to be paid in cash, while unearned revenue is to be provided as a product or a service.
  2. Accounts payable is for services or products that have been delivered in the past time. But unearned revenue is for services or products yet to be provided.
  3. Unearned revenue has a time limit of about one year to deliver the product, while accounts payable are often settled within a month.
  4. If the customer cancels the product or if the company is unable to deliver, unearned revenue is returned in cash. But if a business is unable to pay the accounts payable, it results in default.
  5. Unearned revenue is usually present in subscription-based services or products. While accounts payable is mostly seen with businesses that use goods and services to create new products. 

Conclusion

Although both accounts payable and unearned revenue are treated as current liabilities, they are beneficial for cash flow. Using the prepaid revenue, a company can afford their future expenses for providing their products or services. With accounts payable, the business enterprise can wait till the due date and utilize the cash for beneficial activities.

These two liabilities can be seen under the current liabilities section of the balance sheet. It has to be settled within the given period to avoid repercussions. The process of settling is different in both cases. In unearned revenue, the client is given the service or product once after the payment is made. While accounts payable is delivered following the submission of the invoice and its verification.

References

  1. https://link.springer.com/content/pdf/10.1007/s11156-009-0124-0.pdf
  2. https://journals.sagepub.com/doi/abs/10.1177/0022343312454556
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