Difference Between Accrual vs Deferral
Certain accounting concepts are generally used in any company’s 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.. These are adjusting entries, known as accrual and deferral accountingAccrual And Deferral AccountingAccrual is the process of recording revenue or expenses that have not yet been settled. Deferring means postponing the realization of revenue or expenditure until a later date., used by businesses often to adapt their books of accounts to reflect the accurate picture of the company.
Accrual and deferral are 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 with a time lag in the reporting and realization of income and expense. Accrual occurs before payment or a receipt and deferral occurs after payment or receipt. These are generally related to revenue and expenditure largely.
What is Accrual?
- Accrual of an expense refers to reporting that expense and related liability in the period in which accrual expense occurs. For example, the water expense is due in December, but the payment will not be received until January.
- Similarly, accrual of revenueAccrual Of RevenueAccrued revenues are the company's revenue in the normal course of business after selling the goods or providing services to a third party. However, the payment has not been received. Instead, it is shown as an asset in the balance sheet of the company. refers to reporting of that receipt and the related receivable in the period in which accumulation of income 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 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 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.
- A firm delivering a good or service before receiving cash
- A firm generating a salary expense before paying the employee in cash
What is Deferral?
- 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 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, i.e., not earned by the company. The company owes goods or services to the customer, but the cash has been received in advance.
- For example, the company XYZ gets $10,000 for service over 10 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 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 their customers will render the services.
- Examples of deferrals (expenses)
Accrual vs. Deferral Infographics
Here we provide you with the top 6 differences between accrual and deferral.
Accrual vs. Deferral – Key Difference
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 the creation of a liability as it is in most cases treated as unearned revenue. On the other hand, accrual of income leads to the creation of assets mainly in accounts receivablesForm Of Accounts ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. .
- 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. At the same time, accrued income is ordinary in the service industry.
Accrual vs. Deferral Head to Head Difference
Let us now look at the head-to-head differences 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 a comparison table. You may also have a look at the following articles –