A customer's prepayment for services not yet rendered is initially recorded as unearned revenue (a liability). Then, at the end of the accounting period, the unearned revenue is moved from the balance sheet to the income statement. This is an example of the revenue recognition principle.

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Unearned revenue is initially recorded as a liability, but it is recognized as revenue on the income statement gradually as the services are rendered or goods are delivered, not moved in total at the end of the accounting period. This process aligns with the revenue recognition principle, which states that revenue is recognized when earned, regardless of when the cash is received.

A Customer's Prepayment for Services Not Yet Rendered Is Initially