Deferral - Deferred Revenue

Deferred revenue (or deferred income) is a liability, such as cash received from a counterpart for goods or services that are to be delivered in a later accounting period. When such income item is earned, the related revenue item is recognized, and the deferred revenue is reduced. It shares characteristics with accrued expense with the difference that a liability to be covered later is an obligation to pay for goods or services received from a counterpart, while cash for them is to be paid out in a later period when its amount is deducted from accrued expenses.

For example, a company receives an annual software license fee paid out by a customer upfront on the January 1. However the company's fiscal year ends on May 31. So, the company using accrual accounting adds only five months worth (5/12) of the fee to its revenues in profit and loss for the fiscal year the fee was received. The rest is added to deferred income (liability) on the balance sheet for that year.