Defer / Deferral
When the organization receives money for a particular purpose without yet fulfilling its end of the bargain, you can’t recognize the money as income. The payment is deferred. When the organization performs its obligation, the money is included as income. This is a confusing concept that can lead to disputes between the revenue generation staff and the financial staff.
Imagine that you own a gym and sell a 12-month membership to Ms. Jones for $1,200. In return for the money, Ms. Jones has access to the gym for one year. At the beginning of the year, your company has done nothing for Ms. Jones, so the whole amount is deferred. With the passing of each month, your business can bring $100, or 1/12 of the annual amount, into income. It’s assumed that Ms. Jones is now utilizing the membership.
Action Required? Yes. Deferrals can cause issues between the revenue generation team and the finance team unless the differences are understood. In the simplistic example above, assume that the membership sale occurs at the end of the year.
The revenue generation team may think it meets its objective by bringing in the membership, but the finance team can argue that the money belongs in the next year, not the current year. This is because Ms. Jones has yet to use any portion of your company’s services.