Deferred Income – Definition

Cite this article as:"Deferred Income – Definition," in The Business Professor, updated November 24, 2018, last accessed October 19, 2020, https://thebusinessprofessor.com/lesson/deferred-income-explained/.

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Deferred Income Definition

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.

A Little More on What is Deferred Income

Deferred income is common in subscription-based services or the prepaid services, where the client makes the payment before using the service or product. For example, a company rendering translation services receives a certain percentage of the translation fee in advance prior to start a project. They record it as a liability as they owe the service to the client. After delivering the translation they record it as the actual revenue.

This is often applied to a situation where the services or the products are delivered over a long time and not at once like magazines or new paper. Initially, the total amount received for subscription is recorded as a debit entry to the cash or cash equivalent account. As the time progresses and the company sends out the products (in this case the newspaper or the magazine) and recognizes revenue each month and decreases the debit entry and adds to the credit entry and gradually at the end of the year the entire amount goes to the revenue account of the income statement.

References for Deferred Income

Academic Research on Deferred Income

Accounting for deferred income taxes: Simplicity? Usefulnes, Chaney, P. K., & Jeter, D. C. (1989). Accounting Horizons, 3(2), 6. In this paper, the usefulness of the accounting deferred income taxes was considered and according to this study, the simplicity of this deferred income tax was given special consideration in this study.

Board control and CEO compensation, Boyd, B. K. (1994). Strategic management journal, 15(5), 335-344. This paper explains the theory that assumes that chief executive officers will always attempt to bypass most board measures in a bid to maximize salary. This paper however hypothesized by making use of a sample analysis ran across 193 firms in a cross-section of industries. Also, corporate governance research papers were reviewed in other to develop a multiple indicator measure of board control. However, the chief executive officers’ salaries as hypothesized were seen as greater in most firms that have lower of control and the CEO’s compensation was not really related to the size of the firm or the level of profitability of that firm.

The discounting controversy of deferred income taxes, Boe, S. R. (1989). Journal of Accounting Education, 7(2), 309-315. This paper studies the argument related to the discounting deferred income taxes. According to this study, a quick insight is provided and this insight has significantly helped the argument as regards the surrounding discounting measure more explainable. A conclusion was drawn that discounting is a rather tedious process to be considered as implementing and as such, the FASB needs to pay a closer look at the issues related to discounting and provide a more suitable process which could be used to solve another future related problem inasmuch as discounting deferred income tax is in question.

A transaction approach to understanding and managing customer equity, Dorsch, M. J., & Carlson, L. (1996). Journal of Business Research, 35(3), 253-264. In this study, consumer equity is defined as the value of intangible and tangible resources that customers have engaged or invest in chosen retailers. Nonetheless, the problem associated with identifying or giving recon to customer investments most times lead retailers to abandon their customers. The main aim of this paper is to develop a scheme of customer’s equity from a transaction-based perspective and to bargain the implication for its management by retailers. Furthermore, customers are said to make conscious choices whether to invest their intangible or tangible resources in a retailer although retailers can enhance their likelihood of long-term success by adopting more active roles in managing and creating customers’ equity.

State Taxation of Federally Deferred Income: The Interstate Dimension, Smith, J. C., & Hellerstein, W. (1988). Tax L. Rev., 44, 349. According to this text, several income taxes which are basically imposed follow the rules laid down via levies to the federal model. As regards the assumption that implies conformity to the federal rule in deferring the recognition of that income, when a taxpayer ploughs his gain from the sale of his old apartment in a new apartment, or when he realizes gains obtained from the exchange of similar property. This paper, however, examines the most suitable state tax treatment of the non-recognition transaction that crosses the rules and norms of the state. Also, this study examines the issues of several tax policies and constitutional laws which were born as a result of such transaction by taking into consideration two discrete non-recognition transactions.

Earnings management: New evidence based on deferred tax expense, Phillips, J., Pincus, M., & Rego, S. O. (2003). The Accounting Review, 78(2), 491-521. According to this research paper, the effectiveness of the deferred tax expense in noticing earnings management. However, greater discretion under GAAP than under normal tax rules was assumed in this paper. Assuming most managers exploit such discretion in other to manage income in an increasing manner basically by using methods that do not conflict with the current taxable income, such earnings derived will automatically generate book-tax differences which increase the deferred tax expense. According to the result gotten from this paper, evidences which are in sync with the deferred tax expense generally being extraordinarily useful beyond the abnormal and total accrual gotten from two Jones-type models used in perceiving earnings management in other to avoid a decrease in the earning thereby avoiding a loss.

On the nature of deferred income taxes, Cheung, J. K. (1989). Contemporary Accounting Research, 5(2), 625-641. According to this paper, observations which dictate that most of this controversy centres as regards the subject nature of income taxes were studied. Also, reviews which show the resemblance between European call options inscribed on the firm’s pretax value and the firm’s income values were also studied. Hence, this evaluation proves that the deferred tax effectively modifies the exercise price of the call option propounded by the government which indirectly affects the value of the firm’s equity claims and debt. Further results were also obtained in the course of this paper and this includes the valuing of the firm’s financial claims and the tax liability by making use of an exact option pricing blueprint.

Deferred tax accounting under SFAS No. 109: An empirical investigation of its incremental value-relevance relative to APB No. 11, Ayers, B. C. (1998). Accounting Review, 195-212. In this paper, investigations whether the disclosed net deferred tax liability under the statement of the Financial Accounting Standards No. 109 of the Accounting for Income Taxes allows an additional highly valued information over the revelation required by the Accounting Principle Board Opinion No 11, of the Accounting for Income Taxes. However, evidence garnered from this study suggests that the Accounting for Income Taxes (SFAS No. 109) data signifies highly-valued information which is way beyond the Accounting for Income Taxes (APB No. 11). These results nonetheless suggest that the Accounting for Income Taxes (SFAS No. 109) increased the value-relevance of the deferred tax which amounts in the financial statements.

A Deferred Income Plan for the Corporate Executive, Rustigan, E. C. (1968). ABAJ, 54, 506. In this paper, a deferred income plan which explains the corporate executives and the activities carried out in every sector of the corporate bodies was explained and discussed.

An investigation of alternative treatments of deferred taxes in bond raters’ judgments, Huss, H. F., & Zhao, J. (1991). Journal of Accounting, Auditing & Finance, 6(1), 53-68. According to this research paper, an investigation as regards the alternative treatments of the deferred taxes found in the bond raters’ judgments was analyzed and several assumptions were also discussed in the course of this study.

The valuation of deferred taxes, Amir, E., Kirschenheiter, M., & Willard, K. (1997). Contemporary Accounting Research, 14(4), 597-622. This paper examined some of the opposing arguments as regards the relevance in terms of the value of the deferred taxes. Several questions popped up in the course of this research and these questions were answered by adopting the use of a model of depreciable cash flow dynamics and assets which are similar to that of Ohlson and Feltham (1996). This paper found out that the aggregation is insignificant and rather the deferred taxes are under-valued than the book and earning values. It should be noted that the deferred taxes add value only because they denote the deferral of the tax payment hence; their value is as a result of the net present value of the tax benefits. These results were interpreted to mean that the timing of the turnaround of short-term differences matters as well as staying consistent with empirical activities.

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