Accrual vs Deferral

Certain accounting concepts are generally used in any company's revenue and expense recognition principle. These are adjusting entries, known as accrual and deferral accounting, used by businesses often to adapt their books of accounts to reflect the accurate picture of the company.

Accrual and deferral are accounting adjustment entries with 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 receipt. These are generally related to revenue and expenditure largely.

• Accrual and deferral are accounting methods to report income and expenses with a time lag.
• Accruals are used to recognize transactions before any cash payment or receipt occurs. At the same time, deferrals are used to recognize transactions after the cash exchange has taken place.
• Businesses can record an accrual of revenue entry to record all the revenue simultaneously. At the same time, deferral of income involves spreading revenue over time.
• Deferral identifies the payments and receipts after cash transactions and creates a liability, treated as unearned revenue. Whereas, Accrual of income builts assets, primarily accounts receivables.

• Accrual of an expense refers to reporting that expense and related liability in the period of accrual expense. For example, the water expense is due in December, but the payment will not be received until January.
• Similarly, accrual of revenue refers to reporting that receipt and the related receivable in the period in which accumulation of income is earned. That period is before the cash receipt of that revenue. For example, interest made on bonds investment 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
  • A firm delivering a good or service before receiving cash
  • A firm generating a salary expense before paying the employee in cash

• Deferral refers to the payment of an expense made in one period, but the reporting of that expense is made in some other period.
• Deferred revenue is sometimes known as unearned revenue, i.e., not earned by the company. The company owes goods or services to the customer, but the cash has been received.
• For example, the company XYZ gets $10,000 for service over ten months from January to December. The money has been accepted 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 deducted from the Unearned Revenue monthly as their customers will render the services.
• Examples of deferrals (expenses)
  • Insurance
  • Rent
  • Supplies
  • Equipment

Here we provide you with the top 6 differences between accrual and deferral.

The critical differences between accrual and deferral are as follows: –

• Accrual of revenue entry is passed by the business to book all the revenue at once. Deferral of income refers to the spread of revenue over time. The same is the case with expenses as well.
• When a business passes an adjusting accrual entry, it leads to cash receipt and expenditure. Deferral is the recognition of receipts and payments after an actual cash transaction has occurred.
• Deferral of revenue leads to creating a liability as it is in most cases treated as unearned revenue. On the other hand, accrual of income leads to creating assets, mainly in accounts receivables.

• An example of deferred revenue is the insurance industry, where customers often pay the money upfront. At the same time, accrued income is ordinary in the service industry.

Let us now look at the head-to-head differences between accrual and deferral.

This article is a guide to Accrual vs. Deferral. We discuss the meaning, Accrual vs. Deferral differences (infographics) with a comparison table. You may also have a look at the following articles: –

• Types of Accruals in Accounting
• Accrual vs Provision
• Prepaid Expenses Definition
• Deferred Tax Liabilities