Deferred income
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Deferred Revenue
A liability account used to collect deposits and other cash receipts prior to the completion of the sale.
Investopedia Says:
Deferred revenue is important because it's the money a company collects before it actually delivers a product. For example, a software company sells and receives payment for a computer program before it gets delivered or installed. This doesn't get recorded as straight revenue because, if something goes wrong with the job, the money is at risk.
Related Links:
Learn this easy-to-understand technique of analyzing a company's financial statements and reports. Introduction To Fundamental Analysis
Learn how to use revenue and expenses, among other factors, to break down and analyze a company. Understanding The Income Statement
Learn what it means to do your homework on a company's performance and reporting practices before investing. Advanced Financial Statement Analysis
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Deferred income
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.
See also
- Deferrals in accounting
- Accruals in accounting
References
- ^ John Downes, Jordon Elliot Goodman, Dictionary of Finance and Investment Terms 1995 Barron Fourth Edition ISBN 0-8120-9035-7 page 630
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