Deferral-type adjusting entry definition

What is a Deferral-Type Adjusting Entry?

A deferral-type adjusting entry is an accounting entry that shifts some portion of a recognized amount into a future period. This journal entry may be used to defer the recognition of revenue or an expense. There are two situations in which a deferral-type adjusting entry may be used, which are noted below.

Prepaid Expenses . A prepaid expense is a payment made for which some or all of the expense recognition is deferred. For example, a business purchases liability insurance for $24,000 at the beginning of the year, and uses a deferral-type entry to defer $22,000 of this amount to the next month. In each subsequent month, another $2,000 of this deferral is charged to expense, until the total deferral is eliminated at the end of the year.
Unearned revenues . Unearned revenue is a payment received from a customer, for which the seller has not yet delivered the related goods or services. For example, a snow plowing company receives a $4,000 plowing fee from a customer at the beginning of the winter season, and then recognizes $1,000 of it as revenue in each subsequent month, as it provides services to the customer.

When to Use a Deferral-Type Adjusting Entry

A deferral-type adjusting entry is only used in accrual basis accounting , and usually only during the closing process, in preparation for the release of financial statements .