What is deferred income?
Deferred income is money a business has received in advance for goods or services it has not yet provided, held as a liability until it is earned.
What deferred income means
Under accrual accounting, income counts when it is earned, not when the cash arrives. If a customer pays upfront for a year's subscription, a course next month or a deposit on future work, the business has the cash but has not yet done anything to earn it. That money is recorded as deferred income, sometimes called unearned revenue or income received in advance.
It is a liability on the balance sheet, because the business owes the customer either the service or a refund. Each month, as the service is delivered, part of it moves into revenue in the profit and loss account.
Example
A software company sells an annual licence for £2,400 on 1 October and its year ends on 31 March. At the year end it has provided six months of service.
| At 31 March | Amount |
|---|---|
| Cash received | £2,400 |
| Revenue recognised (6 months) | £1,200 |
| Deferred income on balance sheet | £1,200 |
The remaining £1,200 is released to revenue over April to September of the following year. If it had all been counted as sales on 1 October, this year's profit would be overstated by £1,200.
Why it matters for your business
Businesses that take payment in advance, such as gyms, training providers, software and membership organisations, can look very profitable in the month payments come in and loss-making later. Deferring the income gives an accurate picture of performance and avoids paying Corporation Tax on income that has not yet been earned.
It also reminds you that the cash is not entirely yours yet. If many customers cancel and ask for refunds, that money has to come back out.
Deferred income and VAT
VAT works differently. For VAT, receiving payment in advance usually creates a tax point, so VAT is due on the date you receive the money, even though the income is deferred in your accounts. Keep this in mind when you take large upfront payments near the end of a VAT quarter.
Related terms
Deferred income is the income-side mirror of a prepayment, which is an expense paid in advance. The opposite timing on the cost side is an accrual: a cost incurred but not yet billed.
Common questions
A liability. The business owes goods or services to the customer who has already paid. It appears under current liabilities if it will be earned within a year, and under longer-term liabilities if the service extends beyond that.
Not if they use the cash basis, which is the default for most sole traders since April 2024. Income then counts when received. Limited companies and sole traders on the accruals basis must defer income that relates to future periods.