Accruals and Deferrals

Accruals and deferrals explain how income and expenses are timed in accounting. They are closely related to adjusting entries and are essential under accrual accounting.

Accruals deal with situations where income or expenses are recorded before cash is received or paid.

For example: 

Accrued revenue occurs when services are provided but payment has not yet been received. Accrued expenses occur when expenses are incurred but payment has not yet been made.

Deferrals are the opposite. Deferrals deal with situations where cash is received or paid before income is earned or expenses are incurred. 

For example:

Another example of deferral is unearned revenue. If a business receives advance payment from a customer, it cannot record it as revenue immediately. Revenue is recognized only when services are actually provided.

Accruals increase accuracy by making sure financial statements show what actually happened during the period. Deferrals prevent overstating income or expenses.

In simple terms, accruals record now, cash later. Deferrals record cash now, income or expense later. Both help accounting reflect economic reality rather than just cash movement.