Unearned revenue is money received by an individual or company in exchange for a product or service, yet to be provided or delivered at the time of receipt. In other words, Unearned Revenue is a liability and not an actual asset. Unearned revenue is sometimes referred to as “prepaid revenue” and is considered to be money owed to the customer. According to generally accepted accounting principles, unearned revenue must be recorded on a corporation’s balance sheet under current liabilities as a debt owed to the customer.

Under most circumstances, unearned revenue arises when a customer pays for a product or service before it is delivered. For example, a company may receive pre-payment for subscriptions, products, or services to be delivered in the future. Once the product or service is provided and delivered to the customer, the unearned revenue is converted into earned revenue, or income.

In addition to creating a liability on the balance sheet, unearned revenue also offers other related benefits. It can increase a company's cash flow, allowing it to achieve greater financial stability by covering operational costs, paying debts, and more. Furthermore, recording unearned revenue can also help a company’s income statements appear more favorable in the short run and may give a company better leverage with its creditors in gaining additional financing.

However, companies must also take caution to ensure that unearned revenue is reported in accordance with accounting rules. Specifically, companies must report unearned revenue when it is received and must recognize it as income only when it is earned. Violating these financial reporting standards may result in legal consequences, not to mention a damaging effect on a company’s reputation with both creditors and customers.

Unearned revenue remains an important part of record keeping and accounting cycles. It can provide a company with benefits in the short term while also providing an assurance to the customer that their payment was received and accepted by the company. As long as it is accurately reported to creditors, unearned revenue can be an effective financial management tool.