Revenue vs Deferred Income – What does this mean to a small business owner?

There is sometimes confusion concerning financial statement terms for revenue vs deferred income.  Ok, who am I kidding there is always confusion on revenue vs deferred income for small business owners.   Depending on the business model chosen the terms can be essential in understanding how to recognize revenue.  So the question is: what should a small business owner understand when talking to their accountant?

Revenue

Initially, it is important to understand that income and revenue are often used interchangeably.  The foremost tenant in understanding revenue is that it is recognized differently for the various types of good or service based on the length that it takes to deliver the good or service.  Generally we recognize or record the revenue when the good or service is delivered to the customer.

Therefore, certain types of income are spread and recognized on a project or date principle, which means that it is matched to the actual dates of the product or service.  Although this topic can get complex rather quickly, revenue recognition should be considered one of the more artful aspects of the Profit & Loss Statement due to the leeway in recognition rules.

Deferred Income

In a company that uses accrual accounting, the revenue should be recognized when it is actually earned.  In most cases, the revenue is either recognized at the date of the service or spread over the dates of a program.  The question is what to do with the revenue until it is recognized or earned on the Profit & Loss Statement.  The deferred income account, on the balance sheet, is used to show that the company has the liability or financial obligation to perform a service for the customer.

In other words, deferred income represents money received for products or services that have not yet been delivered.  For instance, when the service has been performed for the customer then the income or revenue will move to the revenue section on the Profit & Loss Statement and deferred income will decrease thus making everyone happy.

What other questions have you had on revenue vs deferred income?