Deferral

A deferral, in accrual accounting, is any account where the income or expense is not recognised 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.