If a company fails to make an adjusting entry for deferred expense, the assets will be overstated. Assume the deferred expense is initially recorded as an asset.

True / False.

Answer: True.

Explanation:

In accrual accounting, revenue is entered when it is earned and expenses are entered when they are incurred.

Deferred revenue is money received by a company in advance of having earned it. In other words, deferred revenues are not yet revenues and therefore cannot yet be reported on the income statement.

As a result, the unearned amount must be deferred to the company's balance sheet where it will be reported as a liability.

When your company receives a customer deposit or prepayment on a sale, that payment occurs in advance of the actual sale and is therefore considered unearned revenue. Deferred revenue flows between the balance sheet and the income statement as revenue.