A deferral takes into account prepaid expenses or early revenue receipts. It is, in other words, payment made or payment received for goods or services that have not yet been delivered. Deferrals enable the expense or revenue to be later recorded in the same period as the delivery of the good or service on the financial statements.
What Is A Deferral In Accounting?
Money paid or received before the delivery of a good or service is referred to as a deferral. Deferral instances include the following:
- Insurance costs
- Recurring payments for services (newspapers, magazines, television programming, etc.)
- A rent deposit
- Products' down payments
- Service agreements (example: cleaners)
- Sporting event tickets
Difference Between Accrual And Deferral
Both Accruals and Deferrals are divided into Expenses and Income:
Expenditures that a business must account for but for which no invoices or payments have been made yet are referred to as accrued expenses. On a company's balance sheet, accrued expenses would be reported under the category "Liabilities."
A company's accrued revenue is the sums for which it is due but has not yet generated bills. They appear on a balance sheet as "Assets."
Costs that have been paid in advance by a company are known as deferred expenses. The word "Assets" denotes them on a balance sheet.
Income that a business has received for its goods or services but has not yet issued an invoice for is known as deferred revenue. The balance statement classifies them as "Liabilities."
Example Of A Deferral
For its full-year D&O insurance, ABC International pays a supplier $24,000 in advance. This is recorded by ABC as a credit to its cash account and a debit to its asset account for prepayments. It records a debit to the insurance expense account for $2,000 and a credit to the prepaid expenses asset account for the same amount after one month when it has used up 1/12th of the prepaid asset.
Does Deferring A Payment Hurt Credit?
If one finds it difficult to make cash payments in full, deferring is a smart solution. If you want to delay making your loan's monthly payments, you can do so without worrying about how it would affect your credit score.
However, the following things can require your attention and consideration:
- Affects overall financial health: Your financial situation as a whole could be impacted by delaying a payment in different ways. Your loans have a tendency to accrue interest, which means you'll ultimately pay more than you intended to.
- Increased monthly payments: Another effect could be an increase in your monthly bills after you start making payments again.
- Late payment charges: Missing a payment is another problem you can experience; this will damage your credit and cost you money for the late payment.