Chapter 3, Problem 3.4EX

To determine

Deferrals:

Deferrals refer to the revenues that are collected in advance before the services are provided or sales are made to the customer, and the expenses are paid in advance before the expenses are incurred.

Deferrals are classified into two types.  They are prepaid expenses, and unearned revenues.

Prepaid expenses:  The expenses are paid in cash, before they are incurred.

Unearned revenue:  The cash is received, before the services are performed.

The expense recognition principle:

The expense recognition principle refers to the expenses that should match with revenue (matching principle) in the period when the company incurred expenses in order to generate the revenue, doesn’t matter, payment is made or not.

To calculate: The amount of supplies purchased during the year.