Editing Deferral

{{Short description|Term in accounting}}
{{Other uses}}
{{Accounting}}
{{More citations needed|date=December 2009}}

In [[accounting]], a '''deferral''' is any [[Account (accountancy)|account]] where the income or expense is not recognised until a future date.

In accounting, deferral refers to the recognition of revenue or expenses at a later time than when the cash transaction occurs. This concept is used to align the reporting of financial transactions with the periods in which they are earned or incurred, according to the [[matching principle]] and [[Revenue recognition|revenue recognition principle]]. Deferrals are recorded as either assets or liabilities on the [[balance sheet]] until they are recognized in the appropriate [[accounting period]].

Two common types of deferrals are '''[[deferred expense]]s''' and '''[[deferred income]]'''. A deferred expense represents cash paid in advance for goods or services that will be consumed in future periods. On the other hand, deferred income (or deferred revenue) is a liability that arises when payment is received for goods or services that have yet to be delivered or fulfilled.

==Deferred charge==
A '''deferred charge''' is a [[cost]] recorded in a later [[accounting period]] for its expected future benefit, or to comply with the [[matching principle]], which matches costs with [[revenue]]. Deferred charges include costs such as those related to [[startup]] activities, obtaining long-term [[debt]], or running major [[advertising]] campaigns. These are carried as non-current [[assets]] on the [[balance sheet]] until they are [[amortized]].

Deferred charges typically extend over five years or more and occur less frequently than '''prepaid expenses''', such as insurance, interest, or rent. Financial [[ratios]] often exclude deferred charges from total assets because they lack physical substance (i.e., they do not generate [[cash]] directly) and cannot be used to reduce total [[Liability (financial accounting)|liabilities]].<ref>{{Cite web |title = Deferred Charge |publisher = BusinessDictionary.com |year = 2010 |url = http://www.businessdictionary.com/definition/deferred-charge.html |accessdate = May 15, 2010 |archive-date = June 15, 2010 |archive-url = https://web.archive.org/web/20100615060706/http://www.businessdictionary.com/definition/deferred-charge.html |url-status = dead }}</ref>

==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]].

==Deferred revenue==
'''Deferred revenue''' (or '''deferred income''') is a [[liability (accounting)|liability]] representing cash received for goods or services that will be delivered in a future [[accounting period]]. Once the income is earned, the corresponding [[revenue]] is recognized, and the ''deferred revenue'' liability is reduced.<ref>John Downes, Jordon Elliot Goodman, Dictionary of Finance and Investment Terms 1995 Barron Fourth Edition {{ISBN|0-8120-9035-7}} page 630</ref> Unlike ''accrued expenses'', where a liability is an obligation to pay for received goods or services, deferred revenue reflects an obligation to deliver goods or services for which payment has already been received.<ref>Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2011). Accounting: Tools for Business Decision Making. 4th Edition. Hoboken: John Wiley & Sons, Inc.</ref>

For example, if a company receives an annual [[software license]] fee upfront on January 1 but its [[fiscal year]] ends on May 31, the company using accrual accounting would only recognize five months' worth (5/12) of the fee as [[revenue]] in the current fiscal year's [[profit and loss statement]]. The remaining amount is recorded as ''deferred income'' (a liability) on the [[balance sheet]] for that year.

==See also==
{{Wiktionary}}
* [[Deferred tax]]
* [[Revenue recognition]]
* [[Matching principle]]
* [[Accrual#Accruals in accounting|Accruals in accounting]]

== References ==
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[[Category:Corporate taxation]]

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