Deferred income

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Deferred income (also known as deferred revenue, unearned revenue, or unearned income) is, in accrual accounting, money received for goods or services which have not yet been delivered. According to the revenue recognition principle, it is recorded as a liability until delivery is made, at which time it is converted into revenue.[1]

For example, a company receives an annual software license fee paid out by a customer upfront on January 1. However, the company's fiscal year ends on May 31. So, the company using accrual accounting adds only five months' worth (5/12) of the fee to its revenues in profit and loss for the fiscal year the fee was received. The rest is added to deferred income (liability) on the balance sheet for that year.

A typical example is an annual maintenance contract where the entire contract is invoiced up front. “I received $12,000 for an annual maintenance contract, but need to recognize it as deferred income, and then recognize $1,000 each month as the service is rendered.”

Deferred income shares characteristics with accrued expense with the difference that a liability to be covered later are goods or services received from a counterpart, while cash is to be paid out in a latter period, when such expense is incurred, the related expense item is recognized, and the same amount is deducted from accrued expenses.

The sentence above seems to clarify the difference between deferred income and accrued expense, but it is quite confusing to explain it in this way. To clarify it in a clearer way, we may say: Deferred income shares characteristics with accrued expense with the difference that deferred income (the money that a company received in advance) indicates the goods and services the company owed to its customers, while accrued expense indicates the money a company owed to others.[2]

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References[edit]

  1. ^ John Downes, Jordon Elliot Goodman, Dictionary of Finance and Investment Terms 1995 Barron Fourth Edition ISBN 0-8120-9035-7 page 630
  2. ^ Kimmel,P.D., Weygandt,J.J., & Kieso,D.E. (2011). Accounting: Tools for Business Decision Making. 4th Edition. Hoboken: John Wiley & Sons, Inc.