Deferred income is money a business has received or invoiced for goods or services it hasn't delivered yet. Until the work is done, the amount sits on the balance sheet as a liability, usually a current liability, and it is released to revenue as it is earned. It is also called deferred revenue or income received in advance.
Why deferred income matters
Under the accruals basis, revenue belongs to the period in which it is earned, not the period in which it is billed. If a customer pays £1,200 up front for a year of service, recording all £1,200 as April's sales would overstate April and leave the next eleven months looking empty. Deferring the income spreads it across the months the service is provided, so each month's management accounts show what the business actually earned.
It also explains the liability. Until the service is delivered, the business owes the customer either the service or, if it can't deliver, the money back.
Deferred income journal: a worked example
A software company sells a 12-month subscription for £1,200, invoiced and paid on 1 April. It provides the service evenly over the year, so it earns £100 a month. Figures are before VAT, which is handled on the invoice as usual.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 1 Apr | Bank | £1,200 | |
| 1 Apr | Deferred income (liability) | £1,200 | |
| Each month end | Deferred income (liability) | £100 | |
| Each month end | Subscription revenue | £100 |
The liability falls as the year goes on:
| Date | Released to revenue to date | Deferred income balance |
|---|---|---|
| 1 Apr | £0 | £1,200 |
| 30 Jun | £300 | £900 |
| 30 Sep | £600 | £600 |
| 31 Dec | £900 | £300 |
| 31 Mar | £1,200 | £0 |
If the company's year end is 31 December, its accounts show £900 of revenue from this contract and a £300 deferred income liability. Had the subscription started on 15 April, spreading by days rather than by months would put a part-month release in April. The prepayments and accruals calculator works the same way for income, using actual days.
Deferred income vs accrued income
The two are opposites, and easy to mix up.
| Deferred income | Accrued income | |
|---|---|---|
| Timing | Invoiced or paid, not yet earned | Earned, not yet invoiced |
| Balance sheet | Liability | Asset |
| Journal | Dr bank or debtors, Cr deferred income | Dr accrued income, Cr revenue |
| Typical example | Annual subscription billed up front | Consulting days worked in March, billed in April |
On the cost side, the equivalents are prepayments and accruals.
Where deferred income sits on the balance sheet
Deferred income is a liability. The part that will be released within the next 12 months is a current liability, within creditors due within one year. UK accounts often group it with accruals on a line called accruals and deferred income. Any part that will be earned more than a year ahead, such as the later years of a three-year contract paid up front, falls due after more than one year.
Common examples of deferred income
- Subscriptions and software licences billed annually or quarterly in advance.
- Support and maintenance contracts paid at the start of the term.
- Retainers and deposits for work not yet done, such as an event booked for next quarter.
- Course and membership fees received before the course or membership period.
- Rent received in advance by a landlord for a future period.
How Briefcase Ledger handles deferred income
Briefcase Ledger spots deferred income in the documents it processes and drafts the release schedule for anything above your materiality threshold (£250 by default). Once a schedule is published, Ledger posts each period's release to the ledger: debit Deferred Revenue, credit the income account. Choose daily or monthly proration as the default for a business, and override it on any item.
Moving a client across mid-year? Bulk import their existing deferred income schedules from a CSV. Imported schedules land in review, ready to check and publish.
Frequently asked questions
Is deferred income an asset or a liability?
A liability. The business has been paid, or has invoiced, for something it still has to deliver. As the goods or services are delivered, the liability falls and the amount moves into revenue.
Is deferred income the same as deferred revenue?
Yes. Deferred revenue is the same thing, and the term is more common in US accounting. UK accounts usually say deferred income or income received in advance.
Is deferred income a debit or a credit?
Deferred income is a liability, so it has a credit balance. You credit it when you invoice or receive the money, and debit it each period as the income is released to revenue.
What is the difference between deferred income and accrued income?
Deferred income is billed before it is earned and is a liability. Accrued income is earned before it is billed and is an asset. One brings revenue forward to the period it belongs to; the other holds it back.