alleryStart learning →A deferred expense arises when a business:
- Receives cash in advance for a service to be performed later
- Incurs a cost that is growing but has not yet been paid or recorded
- Pays for an item in advance and uses it up over future periods
- Earns revenue on a job that will be billed only when finished
Show answer and solution
Correct answer: C. Pays for an item in advance and uses it up over future periods
1. Deferrals cover items bought in advance and used up in the future (deferred expenses).
2. The cash outflow is recorded first as an asset, then expensed as it is used, so C is correct.
3. B describes an accrued expense, not a deferral.
4. A describes deferred revenue and D describes accrued revenue, both different items.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §2.3.1 "Adjusting Entries—Deferrals", p.57_