Deferred income is any form of income received as consideration for goods and services to be delivered at a later date. This means that the money is actually collected before it is earned. It is shown in the accounting material as debt until the goods and services are actually given to the buyer; At this point, it can be recorded in the same way as any type of collected revenue. The opposite concept is a deferred cost.
One of the easiest ways to understand the idea is to look at what happens when an employer chooses to extend a pay advance to an employee. While the employee has not yet earned the benefits extended by the employer, it is reasonable to expect both parties that the employee will eventually offer services that justify compensation. Until the advance is actually earned, the employee actually owes the amount of advances to his or her employer. When the debt is paid in full, the employee can reasonably consider the amount of advances as labor income.
Deferred income is a compensation practice that is employed in a variety of occupations. Contractors often ask for part of the final cost of a construction project in advance. It is expected that the contractor will complete enough work in a short period of time to cover the amount upfront, changing the payment to earned income. Service professionals such as plumbers and electricians may also claim a down payment of a portion of their fees. Until the work is completed, advance also treated as undeserved.
The designation is an important accounting tool that helps keep records straight on what has and has not happened. Because deferred income is not treated in the same way as unearned income, it is possible to use the accounting material as another source of information to keep jobs on track. Listing these revenues as debt makes it harder to lose track of what has and has not been done in relation to a particular customer project.
In some industries, deferred income is an effective means of acquiring the necessary resources to carry out a project on behalf of a customer without tying up other resources to the company. For example, a contractor who overhauls a bathroom for a customer may use advance to buy all supplies for the project rather than spending their own money for the materials. This can help ensure the contractor does not experience a short-term cash flow problem, as the only funds involved in purchasing the materials are earned income.
- Deferred income is any form of income received as consideration for goods and services to be delivered at a later date.
- Service professionals, such as electricians, may claim a down payment of part of their fees.