Accrued income is a current asset and would sit on the balance sheet the Statement of Financial Position under trade receivables. When you eventually raise the invoice for the goods that the customer has had you can eliminate the accrued income as follows:. Deferred income is the exact opposite to accrued income. It would occur in a situation where a customer is paying in advance for goods that we are going to deliver in the future.
Instead we recognise a liability called deferred income. It may seem strange that we are recognising a liability when we are dealing with a customer but if they pay in advance for goods then we owe them that money until we deliver the goods. If we fail to do so we will have to repay them the amount that they have paid. The basic double entry here is much the same as above. One tenant pays for two years in advance and a second tenant will be invoiced for the same two years at the end of the second year.
Show the relevant ledger accounts at the end of the first year. If you found this article helpful, why not sign up for our free AAT revision sessions with our expert tutors? Cornell Cooperative Ext. Advance payments or unearned revenue. Deposits received but not used in the current fiscal period. When a service is provided without immediate compensation or money is received before goods are shipped, the revenue is either accrued or deferred.
Accrued and deferred revenue both relate to the timing of transactions, which are recognized when they occur, not when money changes hands. Allocating revenues to the proper period is a cornerstone of the accrual method of accounting.
Accrued revenues are used for transactions in which goods and services have been provided, but cash hasn't yet been received.
In many cases, these revenues are included in the accounts receivable listing, and accountants don't need to look for them or to book them separately.
A common accrued revenue situation is interest that has been earned but not yet received. The journal entry is to debit or increase interest receivable, an asset account, and to credit or increase interest revenue, which is reported in the income statement.
When the interest is received, the entry is to debit cash, increasing it, and to credit interest receivable, zeroing it out. Deferred revenue and deferral accounting lend themselves naturally to several business models. Some common examples of deferred revenue that we see day to day include:.
When an e-commerce company receives an online payment for goods that they will later send to the customer in the post. When an insurance company receives a premium for the next 12 months of protection.
When a contractor accepts a portion of the cost of the job upfront and defers the remaining balance until the project has been completed. Assuming that all revenue is liquid cash can be a dangerous habit to get into, especially when less than satisfied customers start asking for refunds. By accounting for both accrued and deferred revenue properly, you can maintain a healthy cash flow and prevent your business from spending money that is not yet yours to spend.
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