Prepaid expense

A deferral, in accrual accounting, is any account where the asset or liability is not realized until a future date (accounting period), e.g. annuities, charges, taxes, income, etc. The deferred item may be carried, dependent on type of deferral, as either an asset or liability. See also accrual.

Deferrals are the consequence of the revenue recognition principle which dictates that revenues be recognized in the period in which they occur, and the matching principle which dictates expenses to be recognized in the period in which they are incurred. Deferrals are the result of cash flows occurring before they are allowed to be recognized under accrual accounting. As a result, adjusting entries are required to reconcile a flow of cash (or rarely other non-cash items) with events that have not occurred yet as either liabilities or assets. Because of the similarity between deferrals and their corresponding accruals, they are commonly conflated.

Deferred charge (or deferral) is cost that is accounted-for in latter accounting period for its anticipated future benefit, or to comply with the requirement of matching costs with revenues. Deferred charges include costs of starting up, obtaining long-term debt, advertising campaigns, etc., and are carried as a non-current asset on the balance sheet pending amortization. Deferred charges often extend over five years or more and occur infrequently unlike prepaid expenses, e.g. insurance, interest, rent. Financial ratios are based on the total assets excluding deferred charges since they have no physical substance (cash realization) and cannot be used in reducing total liabilities.

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