Unearned discount is a concept in accounting that is associated with loans and borrowing transactions. It is an interest income that has been received but has not yet been earned. This unearned discount is recorded on the balance sheet as a liability until the loan has matured and the customer has paid its full value.

At the time of issuing a loan or other type of liability, an entity receives a discounted rate of interest (the unearned discount) for the cash that it has advanced. This discounted rate of interest is a benefit to the lender, as it is usually lower than the market rate. Thus, the unearned discount is the difference between the market interest rate and the rate at which the loan is issued.

In accounting terms, the unearned discount is not immediately considered income, but it is recognized as a liability. It is recorded as a liability because its value is uncertain, as the borrower might default or make delays in repayment of the loan. The unearned discount is gradually validated into income as the loan is paid off, by being added to the interest expenses in the income statement.

Financial institutions consider the unearned discounts a key performance metric when determining how successful their lending strategies are. As such, it is important for them to regularly review and monitor this unearned discount to understand the riskiness of their investments.

Unearned discount is an important concept that affects the financial results of entities. While the unearned discount is not accounted for immediately as income, it is an effective way for entities to borrow money at a discounted rate, and thus improve their financial results in the long run.