Which of the following represents a deferral adjusting entry?

• A. Prepaid expenses
• B. Accrued revenues
• C. Accrued expenses
• D. Revenue earned but not yet billed

Answer: (A)

Deferrals occur when you record something as an asset or liability first and then move it to revenue or expense as time passes. Prepaid expenses are assets created when you pay for a benefit before it is used (like prepaid insurance or rent). At the end of the period, you adjust to recognize the portion of that prepaid amount that has been consumed, which means you debit the appropriate expense and credit the prepaid asset. For example, you would debit Insurance Expense and credit Prepaid Insurance for the portion that expired during the period. This is a deferral because it involves deferring the recognition of an expense by initially recording it as an asset and then converting it to expense as time passes. The other scenarios describe accruals—revenue earned but not yet billed, or expenses incurred but not yet paid, or revenue earned but not yet billed—where you recognize revenue or expense before cash moves, not defer it from an asset.