The term “unearned income” refers to a client payment that has yet to be recouped. An unrecorded sale is one for which a company has received money but has not yet entered it into its accounting system. This indicates that the following distinctions exist between unearned income and unrecorded revenue:
- There are no records of unrecorded revenues in the accounting system, but there are for unrecorded revenue (as a cash receipt and an offset obligation).
- Unearned income has not yet been earned by a company, although unrecorded revenue has.
- Although a company has gotten the money from unearned income, the money from unrecorded revenue has not been received.
Grouch Electronics, for example, gets $10,000 from a client to construct a home theatre. Grouch marks the receipt of the payment as a liability since he has yet to execute any work on the contract. This is an example of unearned income. This is an example of unrecorded income since the client did not pay a deposit and Grouch did not issue an invoice to the customer.