Prepaid income

Prepaid income is funds received from a customer prior to the provision of goods or services. It is considered a liability, since the seller has not yet delivered, and so it appears on the balance sheet of the seller as a current liability. Once the goods or services have been delivered, the liability is cancelled and the funds are instead recorded as revenue.

The prepaid income concept is usually seen in businesses that require prepayment for the manufacture of custom goods. It is not used in other industries, such as retailing, where payment is always made at the time of sale or later.

Similar Terms

Prepaid income is also known as unearned revenue.