Deferral

Deferral

[dih-fur-uhl]
Deferred, in accounting, is any account where the asset or liability is not realized until a future date, 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

Deferred is also used in the university admissions process. It is the action by which a school rejects a student for early admission but still opts to review that student in the general admissions pool.

Deferral in accounting

The term deferral is most commonly used in accounting as an abbreviation of deferred income (called also deferred revenue) or deferred expense (called also prepaid expense or prepayment).

Deferred income is a liability. It is recorded when an asset (e.g. receivable) is recorded, but the related income (i.e. revenue) will be earned only in the future.

Prepaid expense is an asset. It is recorded when a liability is recorded, but the related expense will be incurred only in the future.

Example: Company A rents its building to Company B, which has its office in the building. Before the year ending 31 December 2005, the company A issues an invoice to company B. The invoice covers rent for two years: 1 January 2005 to 31 December 2006.

Total rent for the two years is 1,000.

Accounting in Company A as of 31 December 2005
Debit  Accounts Receivable 1,000
Credit Revenue                         500 (rent for 2005)
Credit Deferred income                 500 (rent for 2006)
Accounting in Company B as of 31 December 2005:
Debit  Rental expense       500 (rent for 2005)
Debit  Prepaid Expense          500 (rent for 2006)
Credit Accounts payable     1,000

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