accrualsdeferral

Accruals and deferrals are concepts in accrual basis accounting used to adjust financial statements at period end. Accruals recognize revenues and expenses when earned or incurred, regardless of when cash is received or paid. Deferrals postpone recognizing revenue or expense until a later period, even if cash has already changed hands. Both are accomplished through adjusting journal entries and aim to align reported results with the economic activity of the period. In some discussions the term accrualsdeferral is used informally to refer to the combined process of making such adjustments.

Accruals include accrued revenues and accrued expenses. Accrued revenue occurs when a service is performed or goods are delivered but the related payment has not yet been received or billed. Accrued expense occurs when a cost is incurred in the period but has not yet been paid or recorded. Examples include revenue earned but not yet billed and wages or interest that have accrued but are not yet paid.

Deferrals include deferred revenues and deferred expenses. Deferred revenue arises when cash is received before the related service or goods are provided, creating a liability that is reduced as the revenue is earned. Deferred expense arises when cash is paid before the related benefit is consumed, such as prepaid insurance or rent, which is expensed over time. Depreciation and amortization are also considered methods of cost deferral, allocating the cost of long-term assets over their useful lives.

Adjusting entries for accruals and deferrals are a fundamental aspect of financial reporting under GAAP and IFRS. They ensure that the income statement and balance sheet reflect the true economic activity of the period, rather than the timing of cash flows.