Deferral
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A deferral, in .
Deferrals are the consequence of the
- 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.
Deferral (deferred charge)
Deferred charge (or deferral) is
Deferred expense
A Deferred expense or prepayment, prepaid expense, plural often prepaids, is an
For example, when the accounting periods are monthly, an 11/12 portion of an annually paid insurance cost is added to prepaid expenses, which are decreased by 1/12 of the cost in each subsequent period when the same fraction is recognized as an expense, rather than all in the month in which such cost is billed. The not-yet-recognized portion of such costs remains as prepayments (assets) to prevent such cost from turning into a fictitious loss in the monthly period it is billed, and into a fictitious profit in any other monthly period.
Similarly, cash paid out for (the cost of) goods and services not received by the end of the accounting period is added to the prepayments to prevent it from turning into a fictitious loss in the period cash was paid out, and into a fictitious profit in the period of their reception. Such cost is not recognized in the
Deferred revenue
Deferred revenue (or
For example, a company receives an annual
See also
References
- ^ "deferred charge". BusinessDictionary.com. 2010. Archived from the original on June 15, 2010. Retrieved May 15, 2010.
- ISBN 978-0-618-72185-6. Retrieved 2 April 2012.