Deferred income (also known as deferred revenue, unearned revenue, or unearned income) is, in accrual accounting, money received for goods or services which has not yet been earned. According to the

revenue recognition The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are reco ...

principle, it is recorded as a liability until delivery is made, at which time it is converted into

revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...

. For example, a company receives an annual

software license A software license is a legal instrument (usually by way of contract law, with or without printed material) governing the use or redistribution of software. Under United States copyright law, all software is copyright protected, in both source ...

fee paid out by a customer upfront on January 1. However, the company's

fiscal year A fiscal year (or financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial reporting by businesses and other organizations. Laws in many ...

ends on May 31. So, the company using accrual accounting adds only five months' worth (5/12) of the fee to its

revenues In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive revenu ...

profit and loss An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...

for the fiscal year the fee was received. The rest is added to ''deferred income'' (liability) on the

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

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 Accrual (''accumulation'') of something is, in finance, the adding together of interest or different investments over a period of time. Accruals in accounting For example, a company delivers a product to a customer who will pay for it 30 days ...

, 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''. To put this more clearly, deferred income – the money that a company receives in advance – indicates the goods and services the company owes to its customers, while accrued expense indicates the money a company owes to others.Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2011). Accounting: Tools for Business Decision Making. 4th Edition. Hoboken: John Wiley & Sons, Inc. FASB defines definitive guidance on the revenue recognition for contract delivering companies
ASC 606
provides the latest revenue recognition guidance for such companies.

References

Income statement {{income-stub

See also

References