What is the Difference Between Accrual and Deferral?
🆚 Go to Comparative Table 🆚The main difference between accrual and deferral in accounting lies in the timing of when revenue and expenses are recognized. Here are the key differences between the two methods:
- Timing: Accruals occur when payment happens after a good or service is delivered, while deferrals occur when payment happens before a good or service is delivered.
- Expenses: Accrual expenses are incurred but have yet to be paid (such as accounts receivable), while deferred expenses are paid but have yet to incur expense (such as pre-paid accounts).
- Payments: In the accrual method, there is no payment of cash, whereas in the deferral method, there is an advance payment of cash.
- Revenue: Accrual revenue is earned but has not yet been received (such as accounts payable), while deferred revenue is received but not yet incurred (such as a deposit or pre-payment).
- Expense vs. Revenue: In the accrual method, there is a decrease in expense and an increase in revenue, while in the deferral method, there is an increase in expense and a decrease in revenue.
Accrual accounting recognizes revenue and expenses as and when they are incurred, regardless of when cash is exchanged. This approach provides a more accurate representation of the financial position of a company and can be beneficial in decision-making. On the other hand, deferral accounting postpones the recognition of revenue and expenses until a later period. Choosing between accrual and deferral accounting can significantly impact financial decision-making by affecting cash flow, profitability assessments, and investment decisions.
Comparative Table: Accrual vs Deferral
Here is a table comparing the differences between accrual and deferral:
| Aspect | Accrual | Deferral |
|---|---|---|
| Timing | Occurs before payment and receipt | Occurs after payment or receipt of revenue |
| Expenses | Accrual expenses are incurred, but have yet to be paid (e.g., accounts receivable) | Deferred expenses that are paid, but have yet to incur the expense (e.g., pre-paid accounts) |
| Payments | There's no payment of cash | There's an advance payment of cash |
| Revenue | Accrual revenue is revenue that is earned, but has not yet been received (e.g., accounts payable) | Deferred revenue is revenue that is received, but not yet incurred (e.g., a deposit or pre-payment) |
| Expense vs. Revenue | There's a decrease in expense and an increase in revenue | There's an increase in expense and a decrease in revenue |
In summary, accrual accounting recognizes revenue and expenses as they are incurred, while deferral accounting postpones recognition until a later period. Accrual and deferral methods affect cash flow, profitability assessments, and investment decisions.
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