What is a deferral adjusting entry?

Definition of Deferral Adjusting Entry

A deferral adjusting entry (one of three types of adjusting entries) pertains to a transaction that has already been recorded in the general ledger accounts. However, at the time that the transaction was recorded, part of the amount must be reported as 1) revenue in a future period, or 2) expense in a future period.

The deferral adjusting entry makes certain that the correct amounts will be reported on a company's balance sheets and income statements.

Example of Deferral Adjusting Entry for Expenses

Assume that on December 31, a company paid $12,000 for a maintenance agreement covering the next 12 months. The transaction was recorded on December 31 with a debit of $12,000 to the current asset Prepaid Expense and a credit of $12,000 to the current asset Cash.

On January 31, the company should report that during the month of January it had Maintenance Expense of $1,000 and that its current asset Prepaid Expense now has a debit balance of $11,000. For these amounts to be reported on its financial statements, the following deferral adjusting entry must be made: debit Maintenance Expense for $1,000 and credit Prepaid Expense for $1,000.

Example of Deferral Adjusting Entry for Revenues

On December 31, a maintenance service company received $12,000 and agreed to provide the client with maintenance on its equipment for the next 12 months. The maintenance service company recorded the transaction on December 31 with a debit to Cash for $12,000 and a credit to the current liability account Deferred (or Unearned) Revenues for $12,000.

On January 31, the maintenance service company should report that during the month of January it earned $1,000 and that its current liability account Deferred Revenues now has a credit balance of $11,000. For these amounts to be reported on its financial statements, the following deferral adjusting entry must be made: debit Deferred Revenues for $1,000 and credit Service Revenues for $1,000.

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