03/03/2021
✍️Accrual vs Deferral✍️
Difference Between Accrual vs Deferral
Certain accounting concepts are generally used in the revenue and expense recognition principle for any company. These are adjusting entries, which are known as accrual and deferral accounting, that are used by businesses often to adapt their books of accounts to reflect the real picture of the company.
Accrual and Deferral are a part of those types of accounting adjustment entries where there is a time lag in the reporting and realization of income and expense. Accrual occurs before payment, or a receipt and deferral occur after payment or a receipt. These are generally related to revenue and expenditure largely.
✅What is Accrual?✅
Accrual of an expense refers to reporting of that expense and related liability in the period in which Accrual expense occur. For example, the water expense that is due in December, but the payment are not to be received until January.
Similarly, accrual of revenue refers to the reporting of that receipt and the related receivable in the period in which accumulation of revenue is earned. That period is before the cash receipt of that revenue. For example, interest made on the investment of bonds in December, but the cash will not come until March of next year.
Examples of Accrual accounting include the following.
Interest expense and interest income
when a firm delivers a good or service before receiving cash
when a firm generates a salary expense before paying the employee in cash
✅What is Deferral?✅
Deferral of an expense refers to the payment of an expense which was made in one period, but the reporting of that expense is made in some other period.
Deferred revenue is sometimes also known as unearned revenue, which is not earned by the company yet. The company owes goods or services to the customer, but the cash has been received in advance.
For example, Company XYZ receives $10,000 for a service it will provide over ten months from January to December. But the cash has been received in advance by the company. In that scenario, the accountant should defer $9,000 from the books of account to a liability account known as “Unearned Revenue” and should only record $1,000 as revenue for that period. The remaining amount should be adjusted every month and should be deducted from the Unearned Revenue monthly as the firm to their customers will render the services.
Examples of Deferrals (Expenses)
Insurance
Rent
Supplies
Equipment
