How to Budget Deferred Income

Deferred income or revenue refers to money paid to a business for goods or services that have not yet been manufactured or performed. If your business wants to assign revenue to the months or accounting periods it was actually earned within, you need to use an accrual accounting system that allows for both deferral of income and expenses and accrual of income and expenses. Reporting deferred income within your budget, balance sheets or monthly sales requires a minimal amount of additional bookkeeping entries over the deferral period.

Instructions

1. Review the income received and the current accounting period to determine if a portion of the revenue is for the current period or if the entire amount must be deferred. For example, if you receive a $600 payment in May for landscaping services to be executed in June, July and August, none of the revenue belongs to May, and the lump sum is deferred.

2. Enter the initial $600 payment on your balance sheet, monthly statement or account ledger under your liability column or heading as unearned revenue.

3. Write or type an adjusting entry beneath the entry in your ledger explaining the nature of the unearned revenue. Specify the accounting period the payment was received in and the months the unearned revenue will convert to earned revenue. For example: "Payment of $600 received in May for June, July and August landscaping services."

4. Subtract the proper amount of income from your unearned revenue entry when the first portion of the revenue is fully earned. Write your new unearned revenue total on a new line in your ledger.

5. Add a new adjusting entry explaining, in brief, the removal of a portion of the funds from the unearned revenue account and the time frame for the remaining funds to be withdrawn. For example: "Funds withdrawn from unearned revenue for June landscaping. The remainder of unearned revenue funds covers landscaping contracts for July and August."

6. Enter the earned revenue as an asset on your company balance sheet.

References

• Street Authority, LLC. Deferred Revenue
• Jacksonville State University: Adjusting Journal Entries