What is Deferred Income

Income received as cash in advance for an unfulfilled service or supply is shown as a deferred income liability, not sales revenue.

Description of Deferred Income

Selling the rights for a license covering a set period, which calls for payment in advance is a typical example of how a deferred income liability can arise. Another can be discounts subject to payment by a specified date (retrospective) or to performance as in acheiving a specified target.

Allocating to Sales

Take for example a character merchandise license holder, such as Disney that sells a twelve month license to a toy company for £12,000, which is paid for up front by a toy manufacturer at the beginning of January. Assume that the license holder's financial year end is the 31st. May (i.e. five months later).

When the year end accounts are prepared only £5,000 can be shown as sales revenue in their profit and loss statement, with the remaining £7,000 shown in the balance sheet as a liability under deferred income.

Treatment of Deferred Income Liability

At the end of the next financial year the deferred income liability of £7,000 will then be transferred to that year's sales revenue. This approach preserves the rule that the values for income must be matched by the values of their transactions.

Other common examples of sources of deferred income can arise from deposits, pro-forma invoices, software licenses, insurance, service charge agreements, and other term-specific licenses such as for patents or trademarks.

Discounts as Deferred Income

Where retrospective or performance discounts are concerned, the discount cannot be applied until the specified date has been reached.

These discounts are normally not valid at all until such time as the specified date or performance target has been reached.

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