Accruals and Deferrals
Adjusting entries that defer recognition of cash already received or paid until it is earned or incurred.
FAR tests deferrals through adjusting-entry mechanics: you get a journal entry or fact pattern and must compute the year-end balance or the period’s earned/incurred portion. The “tell” is cash that moved first, leaving a balance sheet account (prepaid asset or unearned/deferred-revenue liability) waiting to be drawn down. The answer hinges on the earned-and-incurred test — how much of the prepayment has lapsed by period-end, not when cash changed hands. A frequent twist: the company records the full receipt as revenue (or full payment as expense) immediately, so the adjusting entry must defer the still-unearned (or unexpired) portion back to the balance sheet.
The classic trap is reversing the direction relative to accruals, which sit opposite on the timeline — cash comes later, creating a receivable or payable, not a prepaid or unearned account. Don’t confuse the matching (expense-recognition) principle (the why — pairing an expense with the revenue it helps generate) with the deferral itself (the mechanism). Hook: defer = delay; recognition waits even though the cash already moved.
PlayPrepHQ study notes are written and reviewed against primary exam sources. How we create & review content →