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Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Accrued Income and Deferred Income Explained

Updated 11 October 2026 · Fact-checked

Accrued income is income earned in the period but not yet received. You add it to income and show a current asset. Deferred income is cash received for a future period. You remove it from income and show a current liability. Both adjust income to match the period earned.

Understand Accrued Income and Deferred Income

Profit is measured on the accruals basis. Income is recognised when it is earned, not when cash arrives. So the cash received in a period is often not the right income figure for that period.

Accrued income is income earned but not yet received at the reporting date. Example: you let out a property and the final month's rent is unpaid at the year end. The income belongs to this year, so you add it to the income account. The other side is a current asset, often called accrued income or other receivables.

Deferred income is income received before it is earned. Example: a tenant pays rent for a period that runs past the year end. The part relating to the next period is not yet earned. You deduct it from income. The other side is a current liability, because you owe the tenant the service (use of the property). It is also called income received in advance.

Think of it as a correction to cash. Income for the year = cash received + income accrued at the end - income deferred at the end, then adjust for opening balances brought forward from last year.

The next year, the opening balances reverse. The opening accrued income is received in cash, so it is not new income. The opening deferred income becomes earned income in the new year.

Key formulas to remember

Income for the period
Income = Cash received - opening accrued income + closing accrued income + opening deferred income - closing deferred income
Use this to find the statement of profit or loss figure from cash received.
Accrued income entry
Dr Accrued income (current asset) / Cr Income
Increases income for amounts earned but not yet received.
Deferred income entry
Dr Income / Cr Deferred income (current liability)
Reduces income for amounts received but not yet earned.
Reversal of opening balances
Opening accrued: Dr Income / Cr Accrued income. Opening deferred: Dr Deferred income / Cr Income
Done at the start of the new period so cash is matched to the right year.
Ledger account layout
In the income account: deferred income c/d is a debit (it reduces income). Accrued income c/d is a credit (it increases income). The balancing figure is the transfer to profit or loss.
Income is a credit balance, so the adjustments that reduce income go on the debit side and the ones that increase income go on the credit side. Opening deferred income is a credit and opening accrued income is a debit.

How to solve Accrued Income and Deferred Income questions

Use this method for any question on income earned or received in advance, whether it asks for a journal, a ledger entry or a figure for the financial statements.

  1. 1Identify the period covered by the income and the reporting date.
  2. 2Work out how much of the income has been earned by the reporting date. Use time: months earned ÷ months in the period × amount.
  3. 3Compare earned income with cash received. If earned is higher, the difference is accrued income. If cash is higher, the difference is deferred income.
  4. 4Write the entry. Accrued: Dr Accrued income, Cr Income. Deferred: Dr Income, Cr Deferred income.
  5. 5Account for opening balances. Reverse last year's accrued or deferred balances at the start of the year.
  6. 6Find the income for profit or loss: cash received, adjusted for opening and closing balances.
  7. 7Place the closing balance in the statement of financial position: accrued income as a current asset, deferred income as a current liability.

Quickest way: Earned minus received

When to use it: Use for number entry or multiple choice questions that ask for the closing balance, but only where there are no opening accrued or deferred balances. If there are opening balances, use the income formula or the ledger account instead.

  1. Check for opening balances first. This method works only where there are none. If there are, use the income formula or the ledger account: opening deferred is a credit to income, opening accrued is a debit to income.
  2. Calculate the income earned for the year from the time period. With no opening balances, this is the profit or loss figure.
  3. Subtract cash received in the year.
  4. If you get a positive difference, it is accrued income. If negative, the size of the difference is deferred income.
  5. Check the answer: asset for accrued, liability for deferred.

Common mistakes in Accrued Income and Deferred Income

  • Treating accrued income as a liability, or deferred income as an asset.

    The word accrued is linked with accrued expenses, which are liabilities.

    Fix: Accrued income is owed to you, so it is an asset. Deferred income means you owe service, so it is a liability.

  • Adding deferred income to income instead of deducting it.

    Students see money received and assume it increases income.

    Fix: Only the earned part is income. Deduct the part received for the future period.

  • Forgetting to reverse opening balances.

    Students focus on the closing adjustment only.

    Fix: Always check for a prior-year balance. It changes this year's income.

  • Using the wrong number of months.

    Students confuse when payment was made with the period it covers.

    Fix: Draw a short timeline from the start of the period to the reporting date and count the months earned.

  • Posting the entry to the wrong side of the income account.

    Income is a credit balance, so debits and credits feel reversed.

    Fix: Deferred income is a debit in the income account, as it reduces income. Accrued income is a credit, as it increases income.

Worked examples

Example 1

A company rents out a unit at $1,200 per month. Its year ends on 31 December. Rent received in the year was $13,200 and the rent for December was not yet received. There was no opening balance. Calculate the rent income for the year and the closing accrued income.

Show the solution
  1. Rent earned for the year = 12 × $1,200 = $14,400.
  2. Cash received = $13,200.
  3. Earned is higher than received by $14,400 - $13,200 = $1,200.
  4. This is accrued income at the year end, equal to one month's rent.
  5. Journal: Dr Accrued income $1,200, Cr Rent income $1,200.

Answer: Rent income is $14,400 and accrued income of $1,200 is shown as a current asset.

Example 2

A company sublets part of its premises. On 1 October it received $6,000 for rent covering 12 months from that date. Its year ends on 31 December. At 1 January there was deferred income of $500 from the previous year. This $500 relates wholly to the current year. Cash received in the year was only the $6,000. Calculate the rent income for the year and the closing deferred income.

Show the solution
  1. The $6,000 covers 12 months, so $500 per month.
  2. Months earned by 31 December = 3 (October to December), so earned = 3 × $500 = $1,500.
  3. Deferred at year end = 9 × $500 = $4,500.
  4. Opening deferred income of $500 relates to the current year, so it is released into this year's income. Opening journal: Dr Deferred income $500, Cr Rent income $500.
  5. Income = cash $6,000 + opening deferred $500 - closing deferred $4,500 = $2,000.
  6. Check: $500 from last year's receipt + $1,500 earned from the new receipt = $2,000.
  7. Journal for closing: Dr Rent income $4,500, Cr Deferred income $4,500.

Answer: Rent income for the year is $2,000 and closing deferred income of $4,500 is a current liability.

Exam tips

  • Read the reporting date first. Many wrong answers come from counting months to the wrong date.
  • In a multiple response question, check each statement for asset versus liability. Accrued income is an asset, deferred income is a liability.
  • For number entry, show your workings on scrap paper: earned, received, difference. This stops sign errors.
  • In ledger questions, look for an opening balance. If there is one, adjust for it before the closing balance.
  • Section B accounts preparation tasks often include these adjustments in a trial balance. Adjust income before you total the profit.

Practice questions from Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Accrued Income and Deferred Income in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accrued Income and Deferred Income: frequently asked questions

What is the difference between accrued income and deferred income?

Accrued income is income earned but not yet received, shown as a current asset. Deferred income is income received but not yet earned, shown as a current liability. Both make sure income is recorded in the period it is earned.

What is the journal entry for deferred income?

At the reporting date, debit the income account and credit deferred income for the amount relating to future periods. This reduces income for the current year and creates a liability. In the next period, the entry reverses.

How do I account for rent received in advance?

Work out the part of the rent that covers periods after the year end. Debit rent income and credit deferred income with that amount. Show deferred income as a current liability in the statement of financial position.

Is accrued income a current asset?

Yes. It is an amount you have earned and expect to receive soon, so it is shown within current assets, often as other receivables or accrued income.