Deferred income
Also known as: deferred revenue, unearned revenue
Deferred income is money a business has received from customers before delivering the goods or services. Because the revenue has not yet been earned, it is recorded as a liability until the company fulfills its obligation.
Deferred income (also called deferred or unearned revenue) arises when cash is collected before the related revenue is earned. Under accrual accounting, revenue is recognized when goods or services are delivered — not when cash changes hands — so an advance payment creates an obligation to the customer rather than income.
Consider a software company that sells a $1,200 one-year subscription paid up front. On day one it debits cash and credits deferred income for $1,200 — a liability. Each month it earns one-twelfth of the contract, so it moves $100 from deferred income into revenue. After six months, $600 has been recognized as revenue and $600 remains on the balance sheet as a liability for services still owed.
Deferred income is the mirror image of accrued income: accrued income is revenue earned but not yet received, an asset, while deferred income is cash received but not yet earned, a liability. Classifying these correctly matters for the accuracy of both the statement of profit or loss and the statement of financial position, and misstatements here are a classic source of exam adjustments. Common real-world examples include magazine subscriptions, insurance premiums received in advance, rent received in advance, and gift cards.
Accounting exams lean on this concept heavily. ACCA Financial Accounting tests deferred income within accruals and prepayments adjustments, and CMA Part 1 extends the deferral idea to income taxes, where timing differences between book and tax income create deferred tax accounts.
Key takeaways
- Deferred income is cash received before revenue is earned, recorded as a liability.
- Revenue is recognized gradually as the goods or services are actually delivered.
- It is the opposite of accrued income, which is revenue earned but not yet received.
- Subscriptions, advance rent, prepaid premiums, and gift cards are common examples.
- ACCA FA tests deferred income in accruals and prepayments; CMA Part 1 applies deferral logic to income taxes.