Deferred gross income is the portion of a company’s revenue that has not been earned, but cash has been collected from customers in the form of a prepayment. Accrued expenses are the expenses of a train that have been incurred but not yet paid.
As an example, SaaS businesses that sell pre-paid subscriptions with benefits rendered over time will defer revenue over the life of the contract and use accrual accounting to demonstrate how the players is doing over the longer term. This approach helps highlight how much sales are contributing to long-term cultivation and profitability.
For example, consider a software company signs a customer to a three-year service contract for $48,000 per year. The guy pays the company $48,000 upfront on January 1st for the maintenance service for the entire year. After receiving payment, the assembly will debit cash for $48,000 and credit (increase) the deferred revenue account for $48,000. As time passes and works are rendered, the company should debit the deferred revenue account and post a credit to the revenue account. For instance, on February 1st, the visitors should recognize $4,000 as a credit in the revenue account ($48,000/12 = $4,000) and debit $4,000 in the deferred revenue account to direct that services have been performed and revenue has been recognized for the period from January 1st to January 31st.
At the mercy of the revenue recognition principles of accrual accounting, revenue can only be recorded as earned in a period when all goods and aids have been performed or delivered. If a company’s goods or services have not been performed or delivered, but a customer has paid for a future secondment or a future good, the revenue from that purchase can only be recorded as revenue in the period in which the good or checking is performed or delivered.
In the case of a prepayment, a company’s good or service will be delivered or performed in a future period. The prepayment is accepted as a liability on the balance sheet in the form of deferred revenue. When the good or service is delivered or performed, the deferred receipts becomes earned revenue and moves from the balance sheet to the income statement.
Under the expense recognition principles of accrual accounting, expenses are recorded in the full stop in which they were incurred and not paid. If a company incurs an expense in one period but will not pay the expense until the go period, the expense is recorded as a liability on the company’s balance sheet in the form of an accrued expense. When the expense is pay off, it reduces the accrued expense account on the balance sheet and also reduces the cash account on the balance sheet by the anyway amount. The expense is already reflected on the income statement in the period in which it was incurred.