What is a Deferral in Accounting?

In accounting, a deferral refers to the delay in recognition of an accounting transaction. This can arise with either a revenue or expense transaction. A deferral is used in order to only recognize revenues when earned and expenses when consumed. The concept is used under the accrual basis of accounting, but not under the cash basis of accounting.

Accounting for a Deferral

As an example of the accounting for a deferral, if a customer were to pay in advance for goods or services not yet delivered, then the recipient should defer recognition of the payment as revenue until such time as it delivers the related goods or services. In regard to expenses, a company may pay a supplier in advance, but should defer recognition of the related expense until such time as it receives and consumes the item for which it paid. In the case of the deferral of a revenue transaction, you would credit a liability account instead of the revenue account. In the case of the deferral of an expense transaction, you would debit an asset account instead of an expense account.

Example of a Deferral

As an example of a deferral, ABC International receives a $10,000 advance payment from a customer. ABC debits the cash account and credits the unearned revenue liability account, both for $10,000. ABC delivers the related goods in the following month, and credits the revenue account for $10,000 and debits the unearned revenue liability account for the same amount. Thus, the unearned revenue liability account was effectively a holding account until ABC could complete the shipment to the customer.

ABC International pays $24,000 of insurance in advance to a supplier for its full-year D&O insurance. ABC records this as a credit to its cash account and a debit to its prepaid expenses asset account. After one month, it has consumed 1/12th of the prepaid asset and records a debit to the insurance expense account for $2,000 and a credit to the prepaid expenses asset account for the same amount.