Difference Between Accrual vs Deferral
There are certain accounting concepts that are generally used in the revenue and expense recognition policy for any company. These are adjusting entries which are known as accrual and deferral accounting that are used by businesses often to adjust their books of accounts to reflect the true 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 a payment or a receipt and deferral occur after a payment or a receipt. These are generally related to revenue and expenditure largely.
What is Accrual?
- Accrual of an expense refers to the reporting of that expense and the related liability in the period in which Accrual expense occur. For example, water expense that is due in December, but the payment of that expense will be not be made until January.
- Similarly, accrual of revenue refers to the reporting of that receipt and the related receivable in the period in which accrual of revenue is earned, and that period is prior to the cash receipt of that revenue. For example, interest earned on the investment of bonds in December, but the cash will not come until March of next year.
- Examples of Accruals includes 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 10 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 on a monthly basis and should be deducted from the Unearned Revenue monthly as the services will be rendered by the firm to their customers.
- 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 pass 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 of an expense or revenue which leads to placing of 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 decrease in cost||The Deferral method leads to a decrease in revenue and increase in cost|
|The end objective of the accrual system is to recognize the revenue in the income statement before the money is actually received||The end objective is to decrease the debit account and to credit the revenue account|
This has a 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 –