A deferred expense arises when a business:
AReceives cash in advance for a service to be performed later
BIncurs a cost that is growing but has not yet been paid or recorded
CPays for an item in advance and uses it up over future periods
DEarns revenue on a job that will be billed only when finished
Answer & 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_