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What is deferred income? Billing in advance, explained
Fractional FD/CFO, FD/CFO of the Year 2019 (British Accountancy Awards).
Written up from his video by Own Your Numbers. Published 28 September 2026.
Deferred income is money you have billed a customer for in advance, before you have delivered the goods or service.
It sits on the balance sheet as a liability and is released into your profit and loss as the goods or service are delivered. Ciaran's example is an invoice covering twelve months.
In this short video, Ciaran O'Donnell explains deferred income in about thirty seconds. His definition is the practical one: it is how you account for billing customers in advance, and how you recognise that income in your profit and loss over the period you have invoiced for.
How deferred income works
Ciaran's example is a twelve-month invoice. When you raise it, the invoice goes onto the balance sheet as deferred income, not straight into this month's sales. In his example, the deferred income is then released to the profit and loss over the twelve-month period.
This matters because, if your business bills customers in advance and you, or your bookkeeper, are not handling deferred income this way, the income in your profit and loss is wrong. The month you invoice looks far better than it was, and the months after look worse.
Why deferred income is a liability
In his balance sheet walkthrough (how to read a balance sheet), Ciaran lists deferred income among the current liabilities, labelled simply "billed your customers in advance". The deferred income records the business's obligation to deliver what it has billed for in advance.
From Ciaran's teaching balance sheet in the Warren Buffett video.
Deferred income: £35,000, listed with the current liabilities.
Total current liabilities: £129,400.
Because it is a liability, it is subtracted when he works out net cash.
Own Your Numbers treats it the same way: recorded deferred income counts as a liability, reducing net cash and the cash cushion.
Deferred income and accrued income are opposites
The two are easy to mix up. Deferred income is invoiced before the work is done. Accrued income is the reverse: work done that you have not yet invoiced. In one of his Beach Talks, Ciaran describes a profitable client with £400,000 of accrued income on its balance sheet: work done but not even invoiced. That is how a business can show a strong profit and still have no money in the bank. The name for it is overtrading.
Deferred income questions, answered briefly
What is meant by deferred income?
Income you have billed a customer for in advance, before you have delivered the goods or service. It is held on the balance sheet and released into the profit and loss as the goods or service are delivered, so each month shows only the income it earned. In Ciaran O'Donnell's twelve-month example, that happens across the twelve months.
What is the difference between accrued and deferred income?
They are opposites. Deferred income is invoiced before the work is done and sits on the balance sheet as a liability. Accrued income is work already done that has not yet been invoiced, and sits on the balance sheet as an asset.
Is deferred income an asset or a liability?
A liability. The business has billed the customer in advance for something it still has to deliver. In Ciaran O'Donnell's balance sheet example it is listed with the current liabilities and reduces net cash.
How do you record deferred income?
In Ciaran's twelve-month example, the income billed in advance is held as deferred income on the balance sheet and released to the profit and loss across that period, rather than all in the month the invoice was raised.
Is deferred income a debit or a credit?
A credit. Deferred income is a liability, and liabilities normally carry a credit balance. If you invoice in advance, the invoice debits the customer's account (receivables) and credits deferred income; when they pay, the bank is debited and receivables credited. If the customer pays before any invoice, the bank is debited and deferred income credited. As the work is delivered, deferred income is debited and revenue credited, so the balance clears once everything promised has been delivered. VAT is recorded separately. This answer is ours; Ciaran does not cover the double entry in his video.
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