Deferred income

Deferred income, sometimes called unearned revenue or prepaid income, represents money a business receives in advance for goods or services that are yet to be delivered. Because the revenue is not yet earned at the time of receipt, it is initially recorded as a liability on the balance sheet and later transferred to revenue as the corresponding goods or services are provided over time.

Example: If a software company collects an annual subscription payment upfront, the amount is first classified as deferred income. The company then recognizes the revenue progressively each month as it provides access to the service throughout the subscription term.