Question

the term deferral best describes a situation in which

Answer 1

One of the fundamental basic accounting principle is Principle of Periodicity which implies that all the revenues and expenses should be recorded in an accounting year. Hence, when an entity receives payment for providing services for more than 1 accounting year then it should not recognize full revenue on the year of receipt. It should split in multiple accounting year this is known as deferral of revenue.

Similarly when an entity pays insurance premium for more than 1 accounting year then it should not book expense during the current year. It should transfer such expense that belongs to upcoming accounting year in an asset account known as prepaid expense account. this process is known as deferral of cost.