Deferred & Accumulated Income - Explained
What is Deferred Income and Accumulated Income?
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Table of ContentsWhat is Deferred Income?What is Accumulated IncomeAdjustment of Entries for Deferred IncomeRelated Topics
What is Deferred Income?
Deferred income is the advance payment received for a service or product yet to be delivered. The deferred income is recorded as a liability in the balance sheet and it remains there until the product or the service is delivered to the client. Deferred income is also known as deferred revenue, unearned revenue or unearned income. It is considered to be a liability because the company owes the product or the service to the customer and the income is not earned yet. It is recognized as the revenue in the income statement only after delivering the product or service.
What is Accumulated Income
Accumulated income, the opposite of deferred income, occurs when money is yet to be received after goods have been supplied or services provided. This revenue is called account receivable.
Accumulated income is often included when calculating the balance sheet of a firm at a period of time.
An accumulated income also refers to the interest that a company accumulates on income that has been earned but is yet to be received. This interest is recorded as interest receivable in a company's active account.
Accumulated income is added to the list of accounts receivable, money earned but not received.
Deferred income is the opposite of accumulated income. In this situation, a company receives money for goods and services it is yet to provide.
When computing the balance sheet or income statement of a firm, deferred income are called deposits and not regarded as real income; rather, they are related to liabilities.
Since a deferred income is not a real income, the net income of a company is not affected by it. Once the expected goods and services are however delivered, the real income value can be accounted for.
Adjustment of Entries for Deferred Income
In some cases, companies recognize deferred income to the extent that it is seen as a real or regular income. This anomaly can be corrected during adjustment of entries at the closing accounting process of a company.
The adjustment might include a review of the revenues to ensure that all incomes are well accounted for and put in right categories.