Deferred income
Encyclopedia
Deferred 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
.
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.
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.
Revenue recognition
The revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized...
principle, it is recorded as a liability until delivery is made, at which time it is converted into revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
.
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
Profit and Loss
Profit and Loss may refer to:* Profit & Loss, monthly business magazine founded in July 1999 especializing in Foreign exchange market and derivative markets...
for the fiscal year the fee was received. The rest is added to deferred income (liability) on the balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
for that year.
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.
See also
- DeferralDeferralDeferred, in accrual accounting, is any account where the asset or liability is not realized until a future date , e.g. annuities, charges, taxes, income, etc. The deferred item may be carried, dependent on type of deferral, as either an asset or liability...
s in accounting - Accruals in accounting