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Understanding Accounting Deferrals

A deferral occurs when an asset or liability is not realized until a future accounting period, such as annuities, charges, taxes, or income. Deferrals result from cash flows occurring before they can be recognized under accrual accounting principles of revenue recognition and expense matching. Adjusting entries are made to reconcile cash flows with events that have not occurred yet, recording the differences as assets or liabilities. Common types of deferrals include prepaid expenses, where cash is paid but the expense has not been incurred, and unearned revenue, where cash is received but the revenue has not been earned.

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17 views1 page

Understanding Accounting Deferrals

A deferral occurs when an asset or liability is not realized until a future accounting period, such as annuities, charges, taxes, or income. Deferrals result from cash flows occurring before they can be recognized under accrual accounting principles of revenue recognition and expense matching. Adjusting entries are made to reconcile cash flows with events that have not occurred yet, recording the differences as assets or liabilities. Common types of deferrals include prepaid expenses, where cash is paid but the expense has not been incurred, and unearned revenue, where cash is received but the revenue has not been earned.

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R.A. Gregorio
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A deferral, in accrual accounting, is any account where the asset or liability is not realized until a

future date (accounting period), e.g. annuities, charges, taxes, income, etc. The deferred item may
be carried, dependent on type of deferral, as either an asset or liability. See also accrual.
Deferrals are the consequence of the revenue recognition principle which dictates that revenues be
recognized in the period in which they occur, and the matching principle which dictates expenses to
be recognized in the period in which they are incurred. Deferrals are the result of cash
flows occurring before they are allowed to be recognized under accrual accounting. As a result,
adjusting entries are required to reconcile a flow of cash (or rarely other non-cash items) with events
that have not occurred yet as either liabilities or assets. Because of the similarity between deferrals
and their corresponding accruals, they are commonly conflated.

 Deferred expense: cash has left the company, but the event has not actually occurred yet.
Prepaid expenses are the most common type. For instance, a company may purchase a year of
insurance. After six months, only half of the insurance will have been 'used' with another six
months of the insurance still owed to the company. Thus, the company records half of the
payment as an outflow (an expense) and the other half as a receivable from the insurance
company (an asset).
 Deferred revenue: Revenue has come into the company, but the event has still not occurred – it
is unearned revenue. A magazine company, for instance, may receive money for a one-year
subscription. However, the company has not spent the resources in producing and delivering
those magazines and thus accountants record this revenue as a liability equal to the amount of
cash received. The magazine company, while now having more cash on hand, also now owes a
year of magazines. The amount of each magazine that gets delivered is then taken out of
liabilities and recorded as revenue during the economic period in which it actually happens, not
just when the company gets paid for it.

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