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Correction
Deferring revenue or expense does not postpone recording cash. Record a prepaid asset when paying for future benefits, or a liability when receiving an advance for future work. Later use or performance produces the expense or revenue.
Separate the cash entry from the adjustment
A deferral places revenue or expense after the related cash payment or receipt. For example, Harbor Design pays an insurance premium before coverage begins. It records Prepaid Insurance and reduces Cash on the payment date. As coverage expires, Insurance Expense increases and Prepaid Insurance decreases. Waiting until coverage expires to record anything would leave Cash overstated and omit the prepaid asset before then.
How to recognize the mistake
Two signs reveal this mistake. The original cash entry is missing, or the full prepaid asset or unearned-revenue liability remains after the company has used some benefit or provided some service.
How to avoid it
Draw the cash date and reporting date. At the cash date, identify what the company controls or owes. At period end, measure both the portion used or earned and the portion remaining. Those portions should reconcile to the original amount, after any additions, refunds, or contract changes.
When this mistake may appear
- Cash is paid for future-period coverage or received before promised service is performed.
- A period-end question asks what portion remains prepaid or unearned.
Your work may contain this mistake if:
- Omits the original cash payment or receipt because expense or revenue is not yet recognized.
- Leaves the entire original asset or liability unchanged after partial consumption or performance.
- Treats the word deferred as permission to postpone every account effect.