Deferrals Definition

Deferrals Definition

A deferral is used in accrual based accounting when an asset or liability has not been realized. It is recognized however because it will be recognized at a future date. Often times a deferral refers to a revenue or expense.

Deferrals Meaning

There are generally two types of deferrals in accounting.

The first, deferred revenue, is considered a liability because usually a service needs to be performed or a product must be delivered before the amount can be realized. This would happen if a customer paid for a product upfront with the guarantee that the company will deliver in the future.

The second is a deferred expense. It is often considered a liability because it is considered cash in the company’s pocket that does not have to be paid yet. Often times this extra cash can be put into short term securities to earn extra for the company. The most common deferred expense though are deferred taxes. This is an amount owed to the IRS, but not for a while. Therefore the company can earn extra cash from interest until they need to pay the amount. The money-generating ability of these deferred expenses is what makes them a liability on the balance sheet.

Deferral Example

King Company is in the business of producing toy crowns. In mid-April, King Company received payment from one of its many toy retailer customers. King has set up a plan with its vendors to pay them on a quarterly basis for plastic and other materials. Therefore, King has decided to invest the amount in short term securities until the payment to its vendors comes due at the end of June. Thanks to the lag time in deferrals King company is able to make an extra almost free profit based off of interest rates for two and a half months before its payment at the end of June.

deferrals definition

See Also:
Deferred Income Tax
Accrual Based Accounting
Accounting Principles
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board (FASB)

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