Understanding deferred income for not-for-profit organisations

How we record and report deferred income has the potential to confuse clients from time to time. The most common question we are asked is, “What is deferred income?” In simple terms, it is money the organisation has been paid upfront for work it still needs to do. If an NFP is paid today for a service or project happening next year, that payment is unearned revenue until the charity actually delivers on the project.

Imagine your not-for-profit receives a $100,000 grant in October for a community program that will run next year. Accounting-wise, that money isn’t considered “earned” since the program hasn’t been delivered. This is an example of deferred income, also known as unearned income or income in advance.

In accounting, a liability is an obligation. When your organisation receives income in advance, it has an obligation to perform a service, run a program, or possibly refund the money if it cannot fulfil the terms of the funding agreement. Australian accounting practice records funds as liabilities, often labelled “Deferred Income” or “Income in Advance” on the balance sheet until they are earned. In other words, the money isn’t truly yours to count as revenue until you’ve done so in the agreement.

Once your organisation delivers the service or meets the grant conditions, you can move that amount out of the liability account and recognise it as revenue in the profit and loss statement.

How deferred income impacts your financials

Recording deferred income correctly affects your financial statements in a few key ways.
On the balance sheet, deferred income appears under liabilities, reflecting that you have a commitment. This increases your liabilities until the income is earned. Not treating advance payments as immediate revenue on the income statement means your current year’s income stays lower. Still, future periods will show higher income when the revenue is eventually recognised. This timing gives a more realistic picture of performance. It prevents one year from showing an inflated surplus due to a big upfront payment, and the following year from showing a deficit when that money is spent.

Remember that deferred income still means the cash is in your bank; however, labelling it as a liability reminds you that those funds are committed to specific purposes and not free for other use.

Deferred income is common in the not-for-profit sector. Here are a few examples of when you would treat funds as deferred income:

• Grant or philanthropic funding for a future project: A government department or foundation provides funding for a program to be delivered next year; until that program is carried out, or conditions are met, the money is recorded as deferred income rather than current revenue.
• Service contract paid upfront: Your NFP signs an agreement to provide services over several months; if the client pays the full fee upfront, you record that payment as deferred income and then recognise the revenue gradually as services are delivered.
• Event or membership fees paid early: A charity sells tickets or memberships for an upcoming event or future period. These fees collected in advance remain unearned until the event occurs or the membership period begins; at this point, they are recognised as revenue.

In all these cases, the key point is timing: the income is officially recognised when the related activity occurs or the obligation is fulfilled, not when the cash comes in.

Accurately recording deferred income is vital for transparency and sound financial management. By separating unearned funds as liabilities, your financial statements clearly show that some of your cash is earmarked for future use. This prevents misunderstandings or misuse of funds. For example, the board won’t mistakenly think you have a huge surplus to spend when that money is set aside for next year’s program. It also ensures year-to-year financial results are measured fairly, without big swings caused by advance payments. Ultimately, handling deferred income correctly builds trust in your organisation’s financial stewardship.

At Accounting For Good, we work with NFP organisations with a turnover of $1M or more.

Contact us if your organisation needs expert financial guidance. Let us handle your accounting needs so you can focus on what matters most: serving your community and driving positive change.