Accounting – Accrual and Deferral

Accounting – Accrual and Deferral

When it comes to the recognition of revenue earned and expenses incurred, the accountants from the accounting firms in Johor Bahru will use some accounting concepts. Accruals and deferrals are probably two of the most important concepts that help in ensuring that the financial statements of a company can reflect the real picture of it. They are the adjusting entries that the accountants would make when there is a time lag between the reporting and realization of revenue or an expense.

Accruals can happen on both revenue and expense. The accrued revenue is the receipt and its relevant receivables that the accountant will record in the period that the company has earned the revenue, even though it has not received the cash payment (Also see Where Should You Record the Accruals on Your Balance Sheet?). This will happen in a few situations. For example, a company may send the goods or deliver the service to its clients before it receives cash. Accruals can happen to an expense too. As an instance, the company incurs an expense for the salary before paying cash to its employees.

Similar to accruals, deferrals can take place on the company’s revenue and expense too. The deferred revenue is the revenue that the company has not earned. This refers to a situation where it has received payments from its clients in advance, yet it has not delivered the goods or services to them (Also see Introduction to Prepayments and Accruals). On the other hand, the deferred expense is an expense that a company has paid, yet it is going to report that expense in another reporting period. Some common examples of deferred expense are rentals, insurance, equipment and so on.

As we can see from the explanation above, accruals and deferrals have a close relationship with the recognition of revenue and expense. Both help in ensuring the accuracy of a company’s financial statements in telling the financial position of a company (Also see 4 Alerting Indications on Your Financial Statements), but both of them have significant differences. The biggest difference would probably be the timing the payments take place. The accruals take place before the company makes a payment or receives cash, whereas deferral happens after the payment or the receipt.

What does this mean? Basically, the statement above indicates that accruals are the revenue that the company have earned or the expenses it has incurred without receiving or paying cash. As against, deferrals are the cash receipts or payments that have taken place, yet the company has not earned the revenue or incurred the expense.

One more thing to note is that they bring different effects on the financial statements of the company too. Taking revenue as an example, accrued revenue would increase the asset of that company, most probably in the form of accounts receivables (Also see What Are Accounts Receivables and Bad Debts?). In contrast, deferred revenue would result in liabilities as the company would most probably treat them as unearned revenue.