Question

Discussion:

1.) Why do accountants include short-term unearned revenues as current liabilities? Do they meet the definition of liabilities found in the conceptual framework? Do they affect working capital? Explain.

2) Present arguments for excluding unearned revenues from current liabilities. Do they affect liquidity? Explain.

Answer 1

1)

Short-term unearned revenues are the revenues that is not earned but cash as been received for the services to be performed in the future within a period of 1 year. So, as and when the services are provided, the unearned service revenue is closed by debiting the unearned service revenue and crediting the service revenue.

So the services are provided within a maximum period of 1 year so they are treated as short-term, hence, they should be included as current liabilities.

Yes, they meet the definition of current liability because they will be earned within a maximum period of 1 year.

Yes, they affect the working capital because the short-term unearned service revenue is included in the current liabilities and the working capital is calculated by deducting the current liabilities from the current assets. Hence, they affect on the working capital.

Unearned revenues should not be excluded from the total current liabilities because they are generally takes time less than a year but when it is expected that it will take more than a year for providing the services for which cash has already been collected and Unearned Revenues is already credited then they should be excluded from the current liabilities because they are not meeting the definition of current liabilities due to taking time more than 1 year.

In this case only, the unearned revenues are excluded from the current liabilities.

Liquidity is affected when cash is received in advance for the services to be performed at a future data, that results into the crediting the Unearned Revenues.