thank you for watching this video about unearned income this video will talk about the type of
unearned income that's time-based income now when I say time-based income I mean income
we earn simply because of the passage of time not income we earn from a specific event and a
specific transaction and the example that I'm using in this video is rental income
keep in mind the method I'm showing you will not keep track of individuals tenants balances for
updated tenants financial records and invoicing tenants for rent please watch our landlord videos
which are on the same website as this video this is meant as a general overview of how you would
record unearned income if your customers pay in advance and the example we're using for any kind
of unearned income is unearned rent that's paid in advance to us from our tenants now because
this is an advanced topic there are some topics that you must learn before this video in order to
understand this video you must know how to make journal entries and have some understanding of
what journal entries are you must know how to memorize transactions in such a way that
the transactions will happen automatically please watch the videos about these specific QuickBooks
tools if you have not ever learned these topics before for our first example let's imagine that
January 1 Johnny the tenant paid holding the owner 6000 dollars for one year's rent in advance
obviously that means that our tenant pays $500 a month you can put the whole six thousand into
rental income if you only report once a year think about it even if you put the six thousand
at the beginning of the year if you don't have any other transactions with any other tenant
that means at the end of the year you'll have six thousand dollars in rental income however if you
need monthly financial statements you must put the six thousand into unearned rent and adjust
this each month unearned income is a current liability type of account well you might ask
what's the difference in the two different ways of recording this and why do we have to record
it that way well if you record it the wrong way which means it all goes into rental income that
means that at the end of January you will report January rent income as six thousand and at the
end of February you will report rent income as zero at the end of March your rent income will
be zero at the end of April zero I think you get the point however if you record it the right way
the way I just described which means you have to make monthly adjustments between prepaid or SUNY
unearned rent and rental income that means that January's rental income is the correct
amount at 500 and February's rental income will be the correct amount at 500 and March and April
and May etc we'll all have the correct amounts of rent income on their individual monthly financial
statements because the tenant really does only pay $500 a month so what do you do well first
when you receive the rent you put all the money into unearned rental income which is a current
liability then at the end of each month make a journal entry adjustment to decrease unearned rent
by the amount of we rent and increase the actual rent income so if you go back to our example on
January 1 we will record receiving unearned rent at 6000 and of course our cash will go up because
Johnny paid us then at the end of January we will adjust that unearned rent down by 500 and put that
500 in actual rental income let's take a look at how to record the original transaction from
the main menu click banking make deposits and of course you have to make sure that you choose the
bank account that the customers rent went into the date was January 1 maybe we'll make it January 1
of 2017 and we received it from Johnny the tenant and the account this is the most important thing
the account is the current liability called unearned rental income and the amount that's
unearned as of January 1 is $6,000 so on January 1 cash and bank went up by 6 thousand but we did not
yet earn it so unearned rental income increases by 6,000 we click Save and close and open the trial
balance and you can see unearned rental income shows up in the trial balance for the first time
as six thousand dollars and of course the cash in the bank increased by six thousand dollars
and now let's make the adjustment journal entry on January 31 for five hundred dollars from the main
menu click company make journal entry now click ok don't worry about assigning numbers this is
an adjusting entry so we might as well leave this checkmark here the journal entry the date will be
January 31 at the end of the first month Derr the customer had paid in advance now the account that
were going to decrease is unearned rent and so we're going to choose unearned rental income and
because we want to decrease it and because it's normally on the credit side we're going to make a
debit to decrease the account that would normally be listed on the credit side you know if you look
on the trial balance you see that unearned rent is listed on the credit side so to decrease it
we'll make a debit during the journal entry that means the next account has to have a credit and
the other account involved in the transaction is rental income right here so after we click
Save and close unearned rent will decrease to $4,500 and rental income will show up on the
trial balance for the first time as $500 click Save and close and open the trial balance and
you can see unearned rental income has decreased to five thousand five hundred and the five hundred
dollars has shown up for the first time in rental income right here five hundred dollars since we're
going to make this very same adjustment at the end of every future month for the next year we should
go ahead and memorize it and let QuickBooks do it automatically the quickest way to go back to the
transaction is click company make journal entry click OK for the number warning and then just
click the back button in the main tab clicking the back button once will get you to the most
recently entered transaction now there's two ways to memorize this in the main tab in the ribbon you
could click memorize and that would be the same thing as having the journal entry be the active
window and going to the top left and clicking edit memorize general journal now the name of
this memorized transaction should be Johnny's rent because it was customer Johnny who paid
you the rent in advance you want to automate this transaction so QuickBooks does this automatically
how often do you want QuickBooks to do this automatically well choose monthly now the
next date should be February 28th of 2017 because if the first one was done at the end of January
then the next one should be done at the end of February and the number remaining should be 11
because there are 11 more months that he had paid in advance so again name it what you need to name
it make sure QuickBooks does it automatically make sure QuickBooks does it in the time period that's
appropriate for rent and it should be the end of the second months rent because we already recorded
the end of the first month 11 remaining for the year click OK and close out the transaction now
to make sure that everything is where it should be you could click lists and then go down to memorize
transaction list and you can see this memorized transaction is here on the list telling you the
next date and telling you that it's automated and giving you lots of information about it
if you need more information about it you could always double click well you could see the entry
itself and click no or you can go to the bottom left and click Edit memorized transaction to go
back to the schedule memorized transaction window and change the properties of how it's memorized