Unearned Interest

You make millions of dollars as a famous lecturer on matters of great philosophical weight. But you get the money mostly because you're extremely attractive and insist on delivering your lectures completely nude. Unearned interest.

Another kind relates to the accounting of money earned from lending.

Banks and other lending institutions make money by loaning out money. The bank makes the loan, handing out a big chunk of cash. It sets up a payment schedule, with each check the borrower sends consisting of some portion of interest and principal.

In concept, the process is pretty simple. However, the accounting for the loan can get intricate. As interest comes in, it's first listed as a liability. That categorization happens because, if the borrower pays the loan off early, the lender would have to return some of the interest they already paid. So, for a period of time, the interest amount sits on the books as a liability. Over time, though, some of the interest gets moved over to the income category. Once the lender knows a cerain amount won't have to get repaid under any circumstance, it can recognize the amount as income.

Unearned interest, then, represents the amount still in limbo. It's been collected, but it has to sit on the liability side of the balance sheet until it gets recognized. It's like a quarantine when someone flies in from some disease-infected island. They just have to hang out alone for a bit, until doctors are sure they aren't going to show any symptoms.