Accounting Online Program Certification Practice Test

Which amount is classified as deferred income in Jeremiah plc's statement at 31 August 20X8?

1. £240

2. £75

3. £5,400

4. £900

The correct answer is: £75

Deferred income, often referred to as unearned revenue, arises when a company receives payment in advance for goods or services that have not yet been delivered or performed. This payment creates an obligation for the company to provide the service or product in the future, hence it is not recognized as revenue immediately. Instead, it is recorded as a liability on the company's balance sheet until the service or product is rendered. In the context of Jeremiah plc's statement as of 31 August 20X8, identifying the correct amount classified as deferred income involves analyzing the amounts provided and understanding which one reflects prepayments from customers that remain unearned at the reporting date. The amount of £75 signifies a scenario where the business has received a lower sum in advance for services or products that are yet to be delivered. This amount being relatively small could indicate that it pertains to a specific contract or service that has not yet been fulfilled by the reporting date. Once the service or product is delivered, this amount will be recognized as revenue, but until then, it correctly fits the definition of deferred income. This accounting treatment ensures that the company is not overstating its revenue, maintaining the integrity of financial reporting by aligning revenue recognition with the fulfillment of obligations. Thus, £75