Deferred income represents payments received for goods and services that were not actually sold or delivered in the same period. Accrual accounting principles require that revenue be recorded at the time of sale. Under these generally accepted accounting principles, the actual income may not be received until sometime in the future. There are also cases where pre-payments for services are received, which is commonly referred to as unearned revenue.
One of the ways in which deferred income might be recorded is in the case of sales commissions. Employers will usually pay their sales representatives commission payments after they have actually earned them. For example, sales that were made in one month may not be paid out until the following month. The company would record the owed commission amount as a liability and then reconcile the amount from its books once it has been paid.
From the sales representative's standpoint, the income has already been earned. It is deferred revenue since he does not receive payment for sales activity as it occurs. Some companies will usually offer some sort of base salary or guarantee that is current to help offset this delay in payment. Commission payments are usually deferred since the employer needs time to reconcile and verify the sale invoices that determine the amount of the commission payments.
Hourly employees are typically paid under this type of structure as well. The hours that they worked in the current week are usually not paid until the following one to two pay periods. Salaried employees on the other hand will usually be paid in the same period.
Companies that provide services and insurance operate under the concept of deferred income. When customers wish to make travel reservations with an airline or pre-pay for a vacation package, the service providers receive payment for services that have not been fulfilled. The amount of payment received for those services is recorded as unearned revenue or unearned income. This represents a liability that the company still owes its customers.
Payments for deferred income are recorded as cash payments when they are received. They are not officially acknowledged as income until the services have been fulfilled. Once they are and the unearned revenue is reconciled from the company's books, the income becomes recognized as current.
Insurance is another product where deferred income comes into play. Many policyholders pre-pay for coverage for the following month or period. The insurance company isn't able to officially recognize the premium payments as income until the actual period for which they have been received has passed. Other examples of companies that typically operate under this type of billing structure are cable television and some types of wireless phone service.
