Deferred accounting is an accounting adjustment mechanism that is used in order to allocate a current expense or income to a future date. In this context, an expense could also be a tax liability. The purpose of deferring an expense or an income is usually to match it to an anticipated future event, such as a potential future income stream or an anticipated future cost. Companies may use deferred accounting for various reasons including tax benefits.
Deferred revenue accounting, also called deferred income accounting, is revenue which is initially recorded in the company accounts as a liability, but which is expected to turn into an asset at a future date. One example where deferred accounting is often used for revenue is “unearned” rental income. This could occur when a tenant pays a landlord a yearly rate. If the tenant pays the full amount of the annual rent in January, then the landlord has an obligation to provide the property for the full year. In other words, the rent will be earned over the period of one year, and if for some reason the landlord became unable to make the property available at some point during the year, then the tenant would be entitled to a refund.
Deferred tax accounting may most often be used in two main situations. First, there may be a temporary difference between the value of an asset used in the company balance sheet and the value attributed to the asset for tax purposes. Second, there may be a difference between the timing of incomes or expenses recorded in the company accounts and the timing of the tax payments or refunds related to the same incomes or expenses.
Deferred compensation accounting is usually used to refer to an arrangement where part of the income earned by an employee is paid out at a later date rather than immediately after the work is performed. Some examples of deferred compensation include retirement planning, pensions, and company stock benefit schemes such as stock options. The usual benefit to the employee of delaying the payment of some of his or her income comes in the form of delayed tax liabilities.
When accounting for deferred tax, the specific tax laws of the country in which the company or corporation is operating must be taken into account. The tax laws surrounding deferred accounts are often complex. It is usually advisable to retain the services of a qualified accountant specializing in deferred accounting when any of these mechanisms are employed.