Revenue and expenses

Accrued income and deferred income

Income belongs to the period in which it is earned, not when cash arrives.

Draft: not yet reviewed by a teacher

Why it exists

This is the mirror of accruals and prepayments for expenses. Cash for a year's membership received in December is not yet earned: the business owes the customer a service. December's rent that a subtenant will pay in January has already been earned.

Key rules

Accrued income: earned but not received. Dr Accrued income, Cr Income; a current asset.
Deferred income: received for work still to be done. Dr Income, Cr Deferred income; a current liability.
Amounts are time-apportioned like expenses: by the months in which the service is given.
At the start of the new year the balances reverse, and the income is recognised when the work is done.
Accrued income increases profit and net assets; deferred income reduces both.

Examples

A studio sublets its hall on Sundays for 200 a month from 1 September. By 31 December it has received 600.

Income for the year: 200 × 4 = 800
Accrued income: 800 − 600 = 200
Dr Accrued income 200, Cr Rental income 200

Accrued income

A gym received 4,800 for annual memberships on 1 November and credited it all to revenue. The year ends on 31 December.

Earned: 4,800 × 2/12 = 800
Deferred income: 4,800 − 800 = 4,000
Dr Revenue 4,000, Cr Deferred income 4,000

Deferred income

How it works

In the income account, the credits are the cash received, the opening deferred income (b/d) and the closing accrued income (c/d); the debits are the closing deferred income (c/d) and the opening accrued income (b/d). The difference is the year's income.

Revenue under IFRS 15 works the same way: it is recognised when the obligation to the customer is satisfied, not when the customer pays.

Traps

Taught in the course

Key rules

Accrued income: earned but not received. Dr Accrued income, Cr Income; a current asset.

Deferred income: received for work still to be done. Dr Income, Cr Deferred income; a current liability.

Amounts are time-apportioned like expenses: by the months in which the service is given.

At the start of the new year the balances reverse, and the income is recognised when the work is done.

Accrued income increases profit and net assets; deferred income reduces both.