The difference between accruals and deferrals
/What is an Accrual?
An accrual allows a business to record expenses and revenues for which it expects to expend cash or receive cash, respectively, in a future period. It is an essential element of the accrual basis of accounting . Using accruals allows a business to more closely adhere to the matching principle , where revenues and related expenses are recognized together in the same period. This results in higher-quality financial statements that incorporate all aspects of a firm’s business transactions . Using accruals minimizes the risk of having residual elements of business transactions appear in subsequent financial statements.
What is a Deferral?
A deferral refers to the delay in recognition of an accounting transaction . This can arise with either a revenue or expense transaction. A deferral is used in order to only recognize revenues when earned and expenses when consumed. The concept is used under the accrual basis of accounting
Comparing Accruals and Deferrals
The main difference between an accrual and a deferral is that an accrual is used to bring forward an accounting transaction into the current period for recognition, while a deferral is used to delay such recognition until a later period.
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Examples of the Difference Between Accruals and Deferrals
Grouch Electronics has purchased merchandise from a supplier . It has received the goods in the current month, but not the associated invoice for $500. Its accountant records an accrual of $500 to record the associated liability in the current month.
Grouch also receives an invoice for $12,000, containing an advance charge for rent on a storage facility for the next year. Its accountant records a deferral to push $11,000 of expense recognition into future months, so that recognition of the expense is matched to usage of the facility.
Grouch provides services to the local government under a contract that only allows it to bill the government at the end of a three-month project. In the first month, Grouch generates $4,000 of billable services, for which it can accrue revenue in that month.
Grouch receives a $3,000 advance payment from a customer for services that have not yet been performed. Its accountant records a deferral to push recognition of this amount into a future period, when it will have provided the corresponding services.
