Question

A deferral adjustment reduces the balance is a ________ account on the balance sheet and transfers that reduction into a ________ account on the income statement.

Answer 1

A deferral adjustment reduces the balance in a prepaid account on the balance sheet and transfers that reduction into an expense account on the income statement.

Step-by-step explanation:

In accounting, a deferral adjustment reduces the balance in a prepaid account on the balance sheet and transfers that reduction into an expense account on the income statement.

For example, let's say a company pays rent in advance for six months. Initially, the prepayment is recorded as an asset on the balance sheet in the prepaid rent account. However, as each month passes, a portion of the prepaid rent is recognized as an expense on the income statement. This reduces the balance in the prepaid rent account and increases the amount reported as rent expense on the income statement.

Overall, the deferral adjustment shifts the recognition of an expense from the period in which the cash was initially paid to the period in which the expense is actually incurred.