Deferred income
Deferred income (also known as deferred revenue, unearned revenue, or unearned income) is, in
For example, a company receives an annual
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. 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.[2]
FASB defines definitive guidance on the revenue recognition for contract delivering companies. ASC 606 provides the latest revenue recognition guidance for such companies.
See also
- Deferrals in accounting
- Accruals in accounting
- Unearned income (Concept in economics)
References
- ISBN 0-8120-9035-7page 630
- ^ Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2011). Accounting: Tools for Business Decision Making. 4th Edition. Hoboken: John Wiley & Sons, Inc.
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