So you’ve signed a new client, you’ve invoiced them and because they are an absolute dream client, they’ve paid you straight away but you’re not actually completing the work for them until the new financial year, what does that mean for your accounts and your tax?!
In the accounting world we call this deferred income.
But what does it mean?
Well, it means you have received the money from a customer for goods or a service but you haven’t yet earned that income. So you haven’t supplied the goods or performed the service yet. It usually happens when a customer pays in advance or pays a deposit.
How does this show in my accounts?
At the end of your financial year, your accountant (if you have one) would move the revenue out of the profit and loss and show it on the balance sheet as a liability called deferred income.
It is a liability because it is revenue that has not been earned and represents products or services that are owed to a customer.
If the business does not deliver the goods or perform the service then the customer would be entitled to a refund.
When do I pay tax on the income?
This also means you would not pay tax on this revenue in this financial year. So your tax liability is also deferred to the following financial year when the revenue is recognised.
The revenue will be moved back from the balance sheet to the profit and loss and taxable once the goods have been delivered or the service performed.
Blog Suggestion: The Accountancy Jargon Cheat Sheet
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