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What is Deferred Accounting?

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  • Written By: C. Martin
  • Edited By: C. Wilborn
  • Last Modified Date: 13 November 2016
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Deferred accounting is an accounting adjustment mechanism that is used in order to allocate a current expense or income to a future date. In this context, an expense could also be a tax liability. The purpose of deferring an expense or an income is usually to match it to an anticipated future event, such as a potential future income stream or an anticipated future cost. Companies may use deferred accounting for various reasons including tax benefits.

Deferred revenue accounting, also called deferred income accounting, is revenue which is initially recorded in the company accounts as a liability, but which is expected to turn into an asset at a future date. One example where deferred accounting is often used for revenue is "unearned" rental income. This could occur when a tenant pays a landlord a yearly rate. If the tenant pays the full amount of the annual rent in January, then the landlord has an obligation to provide the property for the full year. In other words, the rent will be earned over the period of one year, and if for some reason the landlord became unable to make the property available at some point during the year, then the tenant would be entitled to a refund.

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Deferred tax accounting may most often be used in two main situations. First, there may be a temporary difference between the value of an asset used in the company balance sheet and the value attributed to the asset for tax purposes. Second, there may be a difference between the timing of incomes or expenses recorded in the company accounts and the timing of the tax payments or refunds related to the same incomes or expenses.

Deferred compensation accounting is usually used to refer to an arrangement where part of the income earned by an employee is paid out at a later date rather than immediately after the work is performed. Some examples of deferred compensation include retirement planning, pensions, and company stock benefit schemes such as stock options. The usual benefit to the employee of delaying the payment of some of his or her income comes in the form of delayed tax liabilities.

When accounting for deferred tax, the specific tax laws of the country in which the company or corporation is operating must be taken into account. The tax laws surrounding deferred accounts are often complex. It is usually advisable to retain the services of a qualified accountant specializing in deferred accounting when any of these mechanisms are employed.

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SZapper
Post 3

I think deferred accounting makes sense in some situations, especially the situation described in the article where the landlord pays the tenant a whole years rent upfront. Yes, the landlord has been paid. But he technically hasn't earned all the money until the end of the year. And if something goes wrong, he might not earn the money at all!

I think paying a yearly insurance policy upfront is another example of deferred revenue accounting. The insurance company does have the money, yes. But if the person cancels their policy before the year is over, the company must return the portion of the money that covers the rest of the year.

JaneAir
Post 2

@indemnifyme - That sounds like deferred accounting to me, although it's not the traditional kind where the employee gets compensated with stock options at a later time. I think a retirement account if probably the ultimate example of deferred compensation though.

Think about. You and your company (well, hopefully the company contributes) put money in your retirement account. You don't usually get to touch that money until you're in your 50's or older. If you start your retirement account when you're in your early 20's, that's a pretty long time!

indemnifyme
Post 1

My boyfriend is a mobile DJ, and the company he works for uses deferred accounting when it comes to their compensation. When he meets with a client and they book him for their wedding, even if they pay the entire amount, he only gets half of his share of the money.

Then, after he does the wedding, he is able to invoice and get paid the rest of the money. I think since even if the company has been paid they still don't pay him until after the wedding has been performed, this would probably count as deferred accounting.

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