Difference Between Accrual vs Deferral
Certain accounting concepts are generally used in the revenue and expense recognition principleExpense Recognition PrincipleThe Expense Recognition Principle is an accounting principle that states that expenses should be recorded and compiled in the same period as revenues. 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 accountingTypes Of AccountingThere are different types of the accounting which an organization can follow as per the scope of its work and need of stakeholders. Some of them include financial accounting, forensic accounting, accounting information system, managerial accounting, taxation, auditing, cost accounting, etc. 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 receiptCash ReceiptA cash receipt is a small document that works as evidence that the amount of cash received during a transaction involves transferring cash or cash equivalent. The original copy of this receipt is given to the customer, while the seller keeps the other copy for accounting purposes. 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 incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement.
- 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 revenueDeferred RevenueDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future. The examples include subscription services & advance premium received by the Insurance Companies for prepaid Insurance policies etc. 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 RevenueUnearned RevenueUnearned revenue is the advance payment received by the firm for goods or services that have yet to be delivered. In other words, it comprises the amount received for the goods delivery that will take place at a future date. monthly as the firm to their customers will render the services.
- Examples of Deferrals (Expenses)
Accrual vs. Deferral Infographics
Here we provide you with the top 6 difference between Accrual and Deferral
Accrual vs. Deferral – Key Difference
The key difference 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 revenue is generally referring to the spread over of revenue over time. Same is the case with expenses as well
- When a business passes an adjusting entry of accrual, it leads to cash receipt and expenditure. Deferral is recognition of receipts and payments after actual cash transaction has occurred
- Deferral of revenue leads to the creation of a liability as it is in most of the cases is treated as unearned revenue. On the other hand, accrual of revenue leads to the creation of asset mostly in the form of accounts receivablesForm Of Accounts ReceivablesAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet.
- An example of deferred revenueExample Of Deferred RevenueDeferred revenue or unearned revenue is the number of advance payments that the company has received for the goods or services still pending for the delivery or provision. Its examples include an annual plan for the mobile connection, prepaid insurance policies. is the insurance industry, where customers often pay the money upfront. Whereas, accrued revenue is common in the service industry
Accrual vs. Deferral Head to Head Difference
Let’s now look at the head to head difference between Accrual and Deferral
This has been a guide to the top difference between Accrual and Deferral. Here we also discuss the Accrual vs. Deferral along with infographics and comparison table. You may also have a look at the following articles –