Table of Contents
Accrued Income and Deferred Income: Definition, Uses and Examples
- CLFI Team
- 4 min read
In accruals accounting, income is recorded when it is earned, not when cash is received. To make this possible, accountants use two important adjustments — accrued income and deferred income. Both ensure that revenues are recognised in the correct accounting period, following the matching principle accounting framework that keeps profits aligned with activity rather than cash timing.
Understanding Accrued and Deferred Income
When a business provides goods or services but hasn’t yet issued the invoice, it records accrued income (or accrued revenue). This represents income earned but not yet billed or received — an asset on the balance sheet. On the other hand, when a company receives payment in advance for services not yet performed, it records deferred income (also called deferred revenue or unearned income), which appears as a liability until the service is delivered.
Definition
Accrued Income (Accrued Revenue)
Income that has been earned but not yet invoiced or received by the period end. It appears as a current asset on the balance sheet and will convert into cash once payment is received.
Definition
Deferred Income (Deferred Revenue or Unearned Income)
Revenue received before goods or services are provided. It is recorded as a liability on the balance sheet until the income is earned in a future period.
Accrued Income vs Deferred Income — Key Differences
| Aspect | Accrued Income | Deferred Income |
|---|---|---|
| Meaning | Income earned but not yet received. | Income received before it is earned. |
| Balance Sheet Classification | Current asset (accrued income or accrued revenue). | Current liability (deferred income or unearned revenue). |
| Effect on Profit | Increases current period income. | Delays revenue recognition until service delivery. |
| Adjustment Type | Adds earned but unrecorded income. | Removes unearned portion of income. |
| Example | Consulting services performed in December, invoiced in January. | Subscription paid in December for next year’s service. |
Example: Recording Accrued and Deferred Income
Let’s illustrate both cases through adjusting entries that apply the matching principle correctly — showing how accrued revenue and deferred revenue appear in the accounts.
Accrued and Deferred Income Adjustments
Applying the matching principle to earned and unearned revenues.
Scenario 1 — Accrued Income: A consultancy completes £5,000 of work in December but won’t invoice the client until January. Scenario 2 — Deferred Income: A client pays £3,000 in advance for a 3-month service starting next year.
The first entry recognises income earned but not yet invoiced, creating an asset called accrued income. The second entry recognises payment received before earning it, creating a liability called deferred income.
Record the adjusting entries
Post to the ledger accounts
| Accrued Income (Asset) | ||
|---|---|---|
| Date | Debit | Credit |
| 31 Dec 2025 | £5,000 | — |
| Balance | £5,000 (Debit) | |
| Deferred Income (Liability) | ||
|---|---|---|
| Date | Debit | Credit |
| 31 Dec 2025 | — | £3,000 |
| Balance | £3,000 (Credit) | |
The accrued income adds to current assets, while the deferred income increases current liabilities on the balance sheet.
Verify the balance sheet impact
Learning takeaway
These adjustments align reported revenue with actual performance. Accrued income accelerates revenue recognition; deferred income delays it — ensuring income is matched to the period it belongs to.
Interpretation. Accrued and deferred income adjustments are mirror images of each other. Together, they ensure that reported revenue reflects when value was actually delivered or earned — not when cash happened to move. This helps analysts distinguish between timing effects and genuine shifts in business activity.
In Practice
Accrued and deferred income act as the bridge between business activity and accounting recognition. They translate operational performance into measurable financial results, ensuring that revenue reflects the period in which value is created—not simply when cash moves. This alignment prevents short-term cash fluctuations from distorting reported profitability.
For analysts and finance managers, these adjustments are central to understanding revenue visibility, working-capital cycles, and cash-flow forecasting. Deferred income increases short-term liabilities and can temporarily lower the current ratio, while accrued income adds to current assets, signalling revenue earned but not yet received. Interpreting these movements helps assess the timing quality of earnings—whether revenue growth stems from sustainable activity or from early recognition.
At the boardroom level, recognising these distinctions supports more reliable profit analysis, stronger liquidity planning, and clearer insight into how operational timing influences financial performance.
Definition
Balance Sheet
A financial statement showing what a business owns and owes at a specific point in time, summarising assets, liabilities, and equity. For a step-by-step guide to interpreting it, read How to Read a Balance Sheet – Finance for Non-Finance Managers .
Programme Content Overview
The Executive Certificate in Corporate Finance, Valuation & Governance delivers a full business-school-standard curriculum through flexible, self-paced modules. It covers five integrated courses — Corporate Finance, Business Valuation, Corporate Governance, Private Equity, and Mergers & Acquisitions — each contributing a defined share of the overall learning experience, combining academic depth with practical application.
Chart: Percentage weighting of each core course within the CLFI Executive Certificate curriculum.
Grow expertise. Lead strategy.
Build a better future with the Executive Certificate in Corporate Finance, Valuation & Governance.