In accounting, deferred income is money received in advance for services that will be performed in the future. Therefore, it is not considered income until it is earned. This is not recorded in the income statement but in the balance sheet.
Accounting for liabilities is, recognising when services are owed to customers, but the revenue has not yet been earned. The liability is decreased when the revenue is spread out over a period. The portion of the revenue earned in the current period is reported in the profit and loss account.
If a business has an upcoming project that will cost €100,000 and will be rendered over 5 years, a liability of € 100,000 is created in the balance sheet. Each year €20,000 income will be released to the income statement, decreasing the liability to 0 when the 5 years have passed.
Examples of deferred income instances are subscription-related services or the provision of rent paid in advance. In contrast, accrued income is money that a company has earned over the course of its activities and for which an invoice is yet to be issued to the customer.
Accrued income is recorded in line with the accruals concept – matching revenues to the period in which they were earned rather than when the funds were received.
Accrued income is usually listed in the current assets section within the balance sheet.
The double entry for accrued income would be as follows:
Debit Accrued Income (in the balance sheet)
Credit Sales (in the income statement).
Eventually, when the invoice for the services rendered is raised, you debit the sales and credit the accrued income.
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Article by Jasmine Fenech