Deferred income is money a business has received but not yet earned - a customer paying in advance for goods or services still to be delivered. Until it is earned it is a liability, not revenue.
What it means
Under the accrual basis, income is recognised when earned, not when cash arrives. If a customer pays upfront for a year's subscription, recognising it all immediately would overstate the period. The amount sits as deferred income and is released to revenue as the service is delivered. It is the income-side mirror of a prepayment.
Where it fits in
Deferred income is a liability account, because the business owes the customer the goods or services. As they are delivered, the balance is released to revenue period by period, matching income to the period it is earned in.
Key rules
- Cash received before the goods or services are delivered.
- Held as a liability until earned.
- Released to revenue as delivery happens.
- The income-side counterpart of a prepayment.
