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)
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 receivables
- An example of deferred revenue 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
|Accrual occurs before a payment or receipts.||Deferral occurs after a payment or receipt.|
|Accrued expenses are already incurred but not yet paid.||Deferral expenses are already paid but not yet incurred.|
|Accrual in related to prepone or an expense or revenue which leads to cash receipt or expenditure||Deferral leads to postponing an expense or revenue, which leads to placing that amount in liability or an asset account.|
|Accrual is incurring the expenses and earning the revenue without paying or receiving cash.||Deferral is paying or receiving cash in advance without incurring the expenses or earning the revenue.|
|The accrual method leads to an increase in revenue and a decrease in cost.||The Deferral method leads to a decrease in revenue and an increase in cost.|
|The end objective of the accrual system is to recognize the revenue in the income statement before the money is received.||The end objective is to decrease the debit account and to credit the revenue account.|
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 –