Editing Deferral (section)

==Deferred expense==
A '''deferred expense''', also known as a '''prepayment''' or '''prepaid expense''', is an [[asset]] representing cash paid in advance for goods or services to be received in a future [[accounting period]]. For example, if a service contract is paid quarterly in advance, the remaining two months at the end of the first month are considered a deferred expense. The prepaid amount is then recognized as an expense in subsequent accounting periods, with the corresponding amount deducted from the prepayment.<ref name="NortonDiamond2006">{{cite book|author1=Curtis L. Norton|author2=Michael A. Diamond|author3=Donald P. Pagach|title=Intermediate Accounting: Financial Reporting and Analysis|url=https://books.google.com/books?id=Wvxs17T5-D8C&pg=PA25|accessdate=2 April 2012|year=2006|publisher=Cengage Learning|isbn=978-0-618-72185-6|page=25}}</ref>

A deferred expense is similar to [[accrued revenue]], where proceeds from goods or services delivered are recognized as revenue in the period earned, while the cash for them is received later.

For example, if insurance is paid annually, 11/12 of the cost would be recorded as a ''prepaid expense'', decreasing by 1/12 each month as the expense is recognized. This prevents overstatement of expenses in the period of payment and avoids understating them in subsequent periods.

Similarly, cash paid for goods or services not received by the end of the accounting period is added to ''prepayments'' to prevent overstating expenses in the payment period. These costs are recognized in the [[income statement]] (P&L) in the period the goods or services are received and deducted from ''prepayments'' on the [[balance sheet]].