Unearned income, also known as deferred income, refers to income that a business has been paid for in advance, but has not yet earned. This type of income is recorded as a liability on a company’s balance sheet until the goods or services are provided and the income can be recognized as earned.
Examples of unearned income include:
- Advance payment for services that have not yet been performed
- Prepayment for a subscription or membership
- Deposits received for a future service or product
It’s important to track unearned income because it represents a future obligation for the company to fulfill, the company should be aware of these obligations and the timing of when they will need to provide the goods or services in order to recognize the income as earned.
Additionally, the recognition of unearned income over the period of time it is earned is important for financial reporting and compliance with accounting standards, such as generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS).
