Deferred income

What it means

Deferred income is money received or amounts invoiced in the current year that belong in substance to later periods. Typical examples are rent, subscriptions, licence fees or service contracts invoiced in advance. It is recorded on account 384 as part of accruals and deferrals.

The reason is the accrual principle: income belongs to the period in which the company actually performs, not the period of invoicing or payment. If a company invoices an annual licence for next year in December, in the current year it is a liability to the customer, not income.

Deferred income is the opposite of prepaid expenses. Account 384 also holds grants for acquiring fixed assets, which are released to income gradually in line with the depreciation of the subsidised assets.

How it works in practice

For clients with subscriptions or annual contracts we set up invoicing and bookkeeping so that income is released monthly over the service period. Interim results then show real performance without artificial swings.

For asset grants we track the balance on account 384 by project and release it in parallel with depreciation. When a subsidised asset is sold or scrapped, the remainder is released, unless the grant conditions require repayment.

Before the financial statements we break down the balance on account 384 by contract and period. We distinguish it from advances received, which relate to supplies not yet invoiced and are treated differently for VAT.

What to watch out for

If a company books the whole amount invoiced in advance as current-year income, it inflates its result and tax base in a year when it has not yet performed. In an audit the error will be corrected and may also mean interest.

For tax purposes, deferred income follows the accounts. Incorrect deferral therefore changes the tax base directly, which is why we check it as carefully as the income itself.