What does a deferral entry accomplish?

A deferral entry postpones the recognition of revenue or expenses until a future date. This means that transactions that have already occurred are not recorded in the accounts right away but are instead recorded later when the revenue is earned or the expense is incurred.

For example, if a company receives cash in advance for services to be provided in the future, the revenue is not recognized at the time of cash receipt. Instead, it is recorded as a liability (deferred revenue) until the services are actually performed. Similarly, if a company pays for a service in advance, the payment is recorded as an asset (prepaid expense) until the service is consumed.

Deferral entries are essential for adhering to the accrual basis of accounting, which dictates that revenues and expenses should be recorded in the periods they relate to, rather than when cash is exchanged. This helps provide a more accurate picture of a company's financial position and performance over time.