Deferral Explained: Understanding the Basics

A deferral is essentially a temporary delay in the payment or fulfillment of an obligation, such as a loan or a tax bill.

In finance, a deferral can be used to temporarily put off payments on a loan or credit card, often with a fee or interest added to the balance. This can be done to free up cash flow or to avoid penalties for late payment.

Deferrals can be beneficial in certain situations, such as when a business is experiencing financial difficulties or when an individual is facing unexpected expenses. However, they can also lead to a longer payoff period and more interest paid overall.

It's essential to understand the terms and conditions of a deferral to avoid any potential pitfalls.

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A deferral is revenue received before delivery of a product or service to the customer, as well as expenses paid in advance.

This type of revenue is recognized when a customer pays for a product or service ahead of time, or when a company makes a payment to a supplier or vendor for a benefit expected to be received in the future.

A deferral is essentially an amount that can't be reported on the current income statement because it will be an expense or revenue of a future accounting period.

It's like when you prepay your rent for the month, the payment is still deferred until the future period when you can report it on your income statement.

The recognition of a deferral results in adjusting entries being made at the end of an accounting period to move the amount from a balance sheet account to the income statement.

Deferrals are used to describe the type of adjusting entries used to defer amounts at the end of an accounting period.

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Deferrals can be categorized into two main types: prepaid expenses and unearned revenues.

A prepaid expense occurs when a company pays for a service or good before it's received, such as a six-month insurance premium of $12,000 paid on December 1.

The remaining balance of the prepaid expense, in this case $10,000, is deferred and reported as a current asset, like prepaid insurance, on the December 31 balance sheet.

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On the other hand, an unearned revenue is when a company receives payment for a service or good before it's delivered, also known as a liability.

The insurance company receiving the $12,000 for the six-month insurance premium beginning December 1 should report $2,000 as insurance premium revenues on its December income statement, and defer the remaining $10,000 to a balance sheet liability account, such as Unearned Premium Revenues.

In each subsequent month, the insurance company will record an adjusting entry to reduce the liability account Unearned Premium Revenues by $2,000 and report $2,000 as Premium Revenues on its income statement.

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Accrual accounting is a method of accounting that recognizes revenue and expenses when they are earned or incurred, rather than when cash is received or paid. It's a way to match the timing of revenue and expenses, ensuring that financial statements accurately reflect a company's financial performance.

Accrual accounting is based on two key principles: the Revenue Recognition Principle and the Matching Principle. The Revenue Recognition Principle states that revenue is recognized in the period it was earned, not when cash is received. The Matching Principle says that expenses should be recognized in the same period as the corresponding revenue benefit.

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Revenue is recognized when the product or service is delivered to the customer, not when the cash payment is received. This means that revenue is recognized in the period it was earned, even if the cash hasn't been received yet. For example, if a company delivers a product to a customer in December, but the customer pays for it in January, the revenue would be recognized in December.

There are two types of accounting entries that help ensure accurate financial statements under accrual accounting: accruals and deferrals. Accruals are adjusting entries that recognize revenue or expenses before the actual cash transaction takes place. Deferrals, on the other hand, delay the recognition of financial transactions to a future period.

Here's a summary of the key differences between accruals and deferrals:

Deferred revenue is a liability representing cash received for goods or services that will be delivered in a future accounting period. This means that when a company receives payment upfront for a service or product that will be delivered later, the payment is initially recorded as a liability rather than as revenue.

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For example, if a company receives an annual software license fee upfront, it will only recognize a portion of the fee as revenue in the current fiscal year's profit and loss statement. The remaining amount is recorded as deferred income (a liability) on the balance sheet.

Deferred revenue is often confused with accrued expenses, but the key difference is that deferred revenue reflects an obligation to deliver goods or services for which payment has already been received, whereas accrued expenses reflect an obligation to pay for received goods or services.

Here are some common examples of deferrals related to revenue:

In each of these cases, a portion of the payment is recognized as revenue in the current period, while the remaining amount is deferred to a liability account.

Deferrals happen for a variety of reasons, and understanding these reasons can help you prepare for potential delays in your financial aid process.

One common reason for deferrals is a lack of required documents, such as tax returns or financial aid forms. This can cause delays in the processing of your financial aid package.

A deferral can also occur if your school's financial aid office needs more information from you to complete the processing of your aid. This might be due to incomplete or inaccurate information on your application.

In some cases, a deferral may be necessary to verify information, such as your income or family size. This verification process can take several weeks or even months to complete.

A letter of continued interest, or LOCI, is a written statement sent to the admissions office of a school you're still interested in attending, despite being deferred or waitlisted. This letter reiterates your interest in the college and updates the admissions office on any new achievements.

You should write a LOCI when you're still interested in attending the college, but have been deferred or waitlisted. This is usually done to reiterate your interest and fit for the college.

A LOCI is a good opportunity to share any new achievements or accomplishments you've earned since submitting your initial application. These could include academic achievements, volunteer work, or other notable accomplishments.

A deferral can be a real blow to your college hopes, but it's not the end of the story. Many times, it's simply a way for colleges to gather more information about you.

Colleges might defer your application to see what you've been up to during your senior year, so be prepared to highlight any recent accomplishments, grade improvements, or other achievements.

A deferral can also be a result of the college trying to ensure they're building a well-rounded class, and they might not have a clear picture of their Regular Decision pool yet.

It's essential to remember that a deferral doesn't mean you're out of the admissions race. Consider it a second chance to showcase your strengths and what you've accomplished.

If you're deferred, you can send a letter of continued interest to reiterate your interest in the college and update them on any new achievements you've earned since submitting your initial application.

If you're feeling confused after being deferred, it's normal to feel that way. A deferral can be especially confusing, as many colleges have different approaches to handling deferral applications.

Some colleges might ask only for updated grades, while others might accept additional materials that can add context to a student's application.

At IvyWise, we provide deferral counseling services to help students and parents understand their options, their chances of admission, and help them through the deferral process.