Adjusting Entries for Deferrals

Adjusting Entries for Deferrals - Adjusting Entries for...

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Adjusting Entries for Deferrals To defer means to postpone or delay. Deferrals are costs or revenues that are recognized at a date later than the point when cash was originally exchanged. Companies make adjusting entries for deferrals to record the portion of the deferred item that was incurred as an expense or earned as revenue during the current accounting period. The two types of deferrals are prepaid expenses and unearned revenues. Prepaid Expenses Companies record payments of expenses that will benefit more than one accounting period as assets called prepaid expenses or prepayments . When expenses are prepaid, an asset account is increased (debited) to show the service or benefit that the company will receive in the future. Examples of common prepayments are insurance, supplies, advertising, and rent. In addition, companies make prepayments when they purchase buildings and equipment. Prepaid expenses are costs that expire either with the passage of time (e.g., rent and insurance) or through use (e.g., supplies). The expiration of these costs does not require daily entries, which would be impractical and unnecessary. Accordingly, companies postpone the
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Adjusting Entries for Deferrals - Adjusting Entries for...

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