Deferrals (type of adjusting entries) postpone the recognition of expenses and revenues. This occurs because companies may pay for or provide goods and services ahead of time.
In the case of deferred expenses, companies first record a prepaid asset instead of expensing the cost of the good or service purchased because it has not yet contributed to revenue. As the prepaid asset is consumed, an adjusting entry is made in the corresponding period to account for the portion that has been incurred as expense.
In the case of deferred revenues, a liability is first recorded because no revenue has yet been earned and obligation to perform is owed. When the goods or services are actually rendered, revenue is consider earned, and through an adjusting entry is recorded in the relevant period.