Legal Definitions - deferred income

Deferred income refers to money or payments an individual or organization receives for goods or services that have not yet been delivered or performed. Although the cash has been received, it is not considered "earned" income until the corresponding goods are provided or services are rendered. Until that point, it is treated as a liability, representing an obligation to the customer or client.

Here are some examples to illustrate deferred income:

• Annual Gym Membership: Imagine a fitness center sells a one-year gym membership for $600, and a customer pays the full amount upfront on January 1st. The fitness center receives the entire $600 immediately. However, on January 1st, they have only provided one day's worth of access to their facilities. The remaining $598.36 (for 364 days) is considered deferred income. Each month, as the customer uses the gym, a portion of that $600 (e.g., $50 per month) is recognized as earned income, and the deferred income balance decreases accordingly.

• Pre-Paid Legal Retainer: A law firm might receive a $5,000 retainer from a new client to cover future legal services. The client pays this amount before any work has begun. At the moment the firm receives the $5,000, it is deferred income. The firm has an obligation to perform legal services for that client. As the lawyers work on the case and bill their hours, they "earn" portions of the retainer, and that amount is then recognized as actual income, reducing the deferred income balance.

• Software-as-a-Service (SaaS) Subscription: A business subscribes to a cloud-based project management software for a year, paying an annual fee of $1,200 in advance. The software company receives the full $1,200 immediately. However, they have only provided one month's access to their service. The remaining $1,100 (for 11 months) is deferred income for the software company. Each month, as the service is provided, $100 is recognized as earned revenue, reflecting the portion of the service that has been delivered.