Deferred income accounting entry, also known as unearned revenue, refers to money received by a business for goods or services that have not yet been delivered or performed. This is considered a liability because the business owes the customer the product or service.
Example Scenario
Let’s assume a company receives ₹50,000 on 01-07-2024 for a service it will provide over the next six months.
Initial Journal Entry
When the payment is received but the service is yet to be provided:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-07-2024 | Cash | 50,000 | Payment received in advance | |
| 01-07-2024 | To Deferred Income | 50,000 | Deferred income for future services |
Explanation:
- Cash Account Account Debit: Increases the cash account, reflecting the receipt of cash.
- To Deferred Income Account Credit: Increases the deferred income account, representing the liability to provide the service in the future.
Adjusting Entry
As the service is performed, a portion of the deferred income is recognized as revenue. Assuming the service is provided evenly over six months, the monthly revenue recognition would be ₹50,000 / 6 = ₹8,333.33.
At the end of each month, an adjusting entry is made. Here is the entry for 31-07-2024:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-07-2024 | Deferred Income | 8,333.33 | Recognizing monthly service revenue | |
| 31-07-2024 | To Service Revenue | 8,333.33 | Service revenue earned |
Explanation:
- Deferred Income Account Debit: Decreases the deferred income account, reducing the liability as the service is performed.
- To Service Revenue Account Credit: Increases the service revenue account, recognizing the revenue earned.
Conclusion
Deferred income is recorded as a liability when received, reflecting the obligation to provide goods or services in the future. As the obligation is fulfilled, the income is gradually recognized as revenue, ensuring accurate financial reporting. This approach aligns income recognition with the delivery of goods or services, adhering to the revenue recognition principle in accounting.