Deferred income
Deferred income refers to income that has been received but not yet earned. It is also referred to as unearned revenue or advance payments. This type of income occurs when a company receives payment for goods or services that will be delivered at a later date. The company recognizes the payment as a liability on its balance sheet until the goods or services are delivered, at which point the liability is reduced and revenue is recognized. Deferred income is common in industries like subscription services or long-term contracts.
Deferred income refers to the recognition of income by a company that has received payment for goods or services but has not yet fulfilled its obligations to deliver them. It represents money received in advance from customers before products or services are provided.
Here are the steps to understand deferred income:
1. Recognition of advance payment: When a customer makes an advance payment for goods or services, the company recognizes it as a liability on its balance sheet.
2. Deferred revenue account: The advance payment is recorded in a specific account called "Deferred Revenue" or "Unearned Revenue." This account shows the company's obligation to deliver the goods or services for which it has received payment.
3. Revenue recognition: As the company fulfills its obligations and delivers the goods or services, it gradually recognizes the revenue. The amount recognized as revenue is transferred from the deferred revenue account to the income statement.
4. Adjusting entries: At the end of each accounting period, the company may need to make adjusting entries to properly reflect the revenue earned. These adjustments ensure that the financial statements accurately reflect the revenue recognized during the period.
5. Impact on financial statements: Initially, deferred income shows up as a liability on the balance sheet, reducing the company's equity. As revenue is recognized, it increases the company's revenue and net income on the income statement, and reduces the deferred revenue liability on the balance sheet.
It's important to note that the recognition of deferred income may vary based on accounting standards and the specific circumstances of each company. Consulting professional accountants or referring to specific accounting guidelines can provide more accurate guidance.