What is Deferred Income in Accounting?

Deferred income is an advance payment from a customer for goods or services that have not yet been delivered. The concept is commonly applied to the receipt of money related to service contracts or insurance, where the related benefits may not be completed until a number of accounting periods have passed. These payments are considered to be liabilities, because the receiving entity has not yet earned them; instead, it now has an obligation to deliver goods or services to the paying party.

Accounting for Deferred Income

Under the accrual basis of accounting, the recipient records this payment as a liability. Once the goods or services have been delivered, the liability is reversed and revenue is recorded instead.

Presentation of Deferred Income

Deferred income is classified as a liability, so it appears on an organization’s balance sheet as such. In most cases, it will be classified as a current liability, since it is likely to be settled (and converted into revenue) within one year. If it will be settled in more than one year, then it should be classified as a long-term liability. The following exhibit contains a balance sheet in which the deferred income line item is highlighted.

Example of Deferred Income

As an example of deferred income, a company provides custom-built motorcycles to its customers, and requires an advance payment before it begins work. A customer sends the company a $30,000 payment, which is deferred income for the company until it ships the completed motorcycle to the customer. Once the shipment has been made, the company can recognize the $30,000 payment as revenue.