Deferred Income Explained

Cash received in advance of delivery is known as deferred income. That is recorded as a liability in the balance sheet until delivery has been made.

What is Deferred Income

Cash that has been received for goods or services where delivery is yet to be made will represent an incomplete transaction. This is known as deferred income.

For example, if at the end of an accounting financial year / period your company has the benefit of a £1,000 as prepayment for goods or a service that has not yet been delivered, that cash that has not yet been earned: It cannot therefore be of benefit to the balance sheet.

Accounting for Deferred Income in the Balance Sheet

As the advance payment is already in the bank total cash is recorded without adjustment in .balance sheet assets.  

The adjustment to take out the benefit of the £1,000 is made by the inclusion of a .liability - "Deferred Income" reducing the net worth of the balance sheet by that amount.

Deferred Income and Liquidity

If settlement of a deferred liability is to take place within a year, it is recognised as being part of current liabilities, meaning that both shareholders funds (equity) and net current assets (balance sheet liquidity) will be reduced.

If settlement is for greater than a year, it becomes a long-term liability which does not therefore immediately reduce liquidity.

Ring-Fenced Cash

Another example can be for something like a charity, campaign or political party where cash donated is specifically ring-fenced to be used for a specific purpose at some time in the future.

That makes it deferred income until such time as the purpose for which the cash is intended has been served.

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