What is the Difference Between Earned & Unearned Income

By Ben Szweda

Most income that you will receive is likely earned income. If you do a service for someone and invoice them for it and then receive payment, that payment is earned income. In fact, in accrual accounting QuickBooks will have already recorded the income as of the date on the invoice. But in other instances, where you might not send monthly invoices, you may have a decision to make as to whether the cash you’ve just received is earned income or unearned income. Let’s look at rent as an example.

Landlord’s Perspective

Rent is one of the areas where most all my clients see unearned revenue. Let’s say rent is due on the 1st of every month, March 1st, and you don’t send an invoice for it, the tenant is just supposed to send a check each month. It’s likely that the tenant will mail their check around the 25th of February to make sure it reaches you in time. When you receive and deposit that check on the 27th of February, it is unearned income because you have yet to provide any service in March.

When recording this deposit in QuickBooks, select an Other Current Liability account called Unearned Rent. That balance will sit there until March 1st. On March 1st you can record a journal entry and move the money from the liability account, to an income account. You follow this same process if your tenant decided to prepay you several months of rent in advance. As each month comes around you would create a journal entry to record the income for that one month. If you view an Income Statement by month, this process will cause there to be the same amount of rent in each month/column.

Tenant’s Perspective

From this perspective, you will need an Other Current Asset account called Prepaid Rent. Whether you print and date your rent check on the 25th of February per the above example or pre-pay several month’s of rent, you will want to code the check to Prepaid rent, not to rent expense. When the first rolls around, or the month for which you prepaid, create a journal entry to move the rent amount from Prepaid to expense. Only initially use rent expense if you cut your check on or after the 1st.

Other Types of Unearned Income

In addition to rent, in any situation where there is a pre-payment you are likely to find unearned income. Think magazine subscriptions, season or package subscriptions (think sports or theater), or even ticket purchases in July for an event that isn’t until September. My nonprofit clients often run into pre-paid expenses when they have a big annual event in September, but start buying supplies and paying vendors for it in early summer.

Another increasingly common example are annual subscriptions for a service that will be used all year long. If you sell a music subscription service for $20 per month or one annual payment of $192, in the month of the sale you need to record $16 of income and $176 of unearned income.

Cleveland Accounting Services

If you are looking to save yourself time and have a Cleveland Accounting Service Professional bring their expertise, let Szweda Consulting help. We work with firms in Cleveland, and beyond, with Bookkeeping Services, Quickbooks Training, Preparing Financial States for Business Loans, and much more!

Led by Benjamin Szweda, Szweda consulting provides many services to help you focus your time where it is best spent; building your business. Ben has helped hundreds of businesses like yours navigate the complexities of tax and accounting that has keep business owners back from their full potential.

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