AccuraBooks Deferred Income
This article deals with the concept of Deferred Income and how to simply convert to regular, or earned, income in your bookkeeping using a journal entry.
Deferred Income is simply monies you have received in advance of performing your obligations to earn that income. These obligations can be providing a service or shipping of products to your customers.
If you have ever had to pre-pay for a service or product to be provided later, then those monies you paid are obligations by the providing party who received your monies. In other words, they would post as some sort of deferred income until they satisfy their obligations to you at a later date. Typically, the “later date” is going to be very soon.
So, if you are one of those service or product providers that always receives money prior to satisfying your obligations, then you would only post these monies as a liability in your bookkeeping, for now.
To do this, you would create an Other Current Liability type of account in your Chart of Accounts. This liability account could be called “Deferred Income” or “Services Deferred Income” or something like this.
At some point you will want to then post an entry to take this Deferred Income and recognize it as regular or earned income (i.e. Sales, Revenues, Income, etc.).
If you are the only bookkeeper on staff maintaining the books for your company, you might be able to wait each month to post entries to recognize income (from Deferred Income). You would have to be sure your calculations are correct to ensure you capture all Deferred Income to convert to earned income for that month (an end-of-the-month journal entry).
So, when you first receive monies from customers that is not earned yet, then you would post these monies to “Deferred Income.”
Later, at the end of a month (or some other date that is appropriate), to now recognize earned income, here is an example of a journal entry that will accomplish this:
Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.