Definition of Deferral
A deferral often refers to an amount that was paid or received, but the amount cannot be reported on the current income statement since it will be an expense or revenue of a future accounting period. In other words, the future amount is deferred to a balance sheet account until a later accounting period when it will be moved to the income statement.
Deferral is also used to describe the type of adjusting entries used to defer amounts at the end of an accounting period.
Examples of a Deferral
Assume that a company with an accounting year ending on December 31 pays a six-month insurance premium of $12,000 on December 1 with insurance coverage beginning on December 1. One-sixth of the $12,000, or $2,000, should be reported as insurance expense on the December income statement. The remaining $10,000 is deferred by reporting it as a current asset such as prepaid insurance, on its December 31 balance sheet.
A deferral also occurs with revenues. The insurance company receiving the $12,000 for the six-month insurance premium beginning December 1 should report $2,000 as insurance premium revenues on its December income statement. The remaining $10,000 should be deferred to a balance sheet liability account, such as Unearned Premium Revenues. In each subsequent month the insurance company will record an adjusting entry to reduce the liability account Unearned Premium Revenues by $2,000 and report $2,000 as Premium Revenues on its income statement.
