Deferred income: Difference between revisions
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'' | ''Financial reporting''. | ||
Income for which payment has been received by the business but which has not yet been earned. | Income for which payment has been received by the business, but which has not yet been earned. | ||
<span style="color:#4B0082">'''''Example: Five year licence'''''</span> | <span style="color:#4B0082">'''''Example: Five year licence'''''</span> | ||
Our accounting year runs from 1 January to 31 December. | |||
One of our customers has paid us in advance, at the start of January for a five-year licence. | |||
We recognise the revenue in our income statement spread over the full five years. | |||
We have a liability / obligation to provide | At the end of the first year 4/5 of the total received from the customer is Deferred income. | ||
We have a liability / obligation to provide a further four years of service, for which we have already been paid in advance. | |||
Deferred income is recorded as a credit balance in the balance sheet. | Deferred income is recorded as a credit balance in the balance sheet. | ||
(The related accounting entries being DEBIT Cash and CREDIT Deferred income.) | (The related accounting entries for the initial receipt being DEBIT Cash and CREDIT Deferred income.) | ||
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For reporting presentation purposes it is often aggregated with Accruals as 'Accruals and deferred income'. | For reporting presentation purposes it is often aggregated with Accruals, as 'Accruals and deferred income'. | ||
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* [[Accrual]] | * [[Accrual]] | ||
* [[Accruals accounting]] | * [[Accruals accounting]] | ||
* [[Accrued expense]] | |||
* [[Accrued income]] | * [[Accrued income]] | ||
* [[Balance sheet]] | * [[Balance sheet]] | ||
Revision as of 10:35, 16 September 2020
Financial reporting.
Income for which payment has been received by the business, but which has not yet been earned.
Example: Five year licence
Our accounting year runs from 1 January to 31 December.
One of our customers has paid us in advance, at the start of January for a five-year licence.
We recognise the revenue in our income statement spread over the full five years.
At the end of the first year 4/5 of the total received from the customer is Deferred income.
We have a liability / obligation to provide a further four years of service, for which we have already been paid in advance.
Deferred income is recorded as a credit balance in the balance sheet.
(The related accounting entries for the initial receipt being DEBIT Cash and CREDIT Deferred income.)
Deferred income is a liability of the reporting entity to provide the services that the customer has already paid for.
For reporting presentation purposes it is often aggregated with Accruals, as 'Accruals and deferred income'.
