Accrual vs. Deferral: Why Timing Matters in Accounting

 

In the world of business, when you record money matters just as much as how much money you’re dealing with. That’s where two key accounting concepts come into play: Accrual and Deferral. Whether you're running a small business, managing the books, or just learning accounting, understanding these two ideas can help you keep your financial records accurate and honest.

Let's break it down into simple terms.

What is Accrual?

Accrual means you record income or expenses whenthey happen, not when the cash comes in or goes out.  Simply put, accrual accounting is an accounting approach that records revenue in the period in which it is generated and realizable, rather than when the cash is actually received. It gives a clearer picture of your financial activity during a specific period—even if no money has changed hands yet.

Two Everyday Examples of Accrual

1. Accrued Expenses

These are the costs you owe but still haven't paid.

• Real-life example: Your employees work in June, but you cut the paycheck in July.
• In this case, you still need to record that payroll in June as an Accrued Expense, because the work was already done. It also shows up as a liability called Accrued Salaries.

2. Accrued Revenues

This is money you've earned but haven’t been paid for yet.

• Example: You finish a job for a client in March but send the invoice in April.
• Even though you won’t get paid until later, the work was done in March—so you record it as Accrued Revenue and list it as an asset under Accounts Receivable.

What is Deferral?

Deferral is the opposite. It means you delay recording revenue or expenses until a future period—even though the cash has already moved. Which means amount cannot be reported on the current income statement since it will be an expense or revenue of a future accounting period. This helps make sure you match income and expenses to the period they actually apply to.

Deferral is also used to describe the type of adjusting entries used to defer amounts at the end of an accounting period.

Two Common Types of Deferrals

1. Prepaid Expenses (Deferred Expenses)

You pay for something now, but you’ll benefit from it over time.

• Example: You pay $1,200 in January for a 12-month business insurance policy.
• You don’t count the whole $1,200 as an expense right away. Instead, you record it as Prepaid Insurance (an asset) and spread out the cost—$100 each month—as a Deferred Expense.

2. Unearned Revenue (Deferred Revenue)

You get paid upfront for a service you haven’t delivered yet.

• Example: A customer pays you $3,000 in January for a 3-month consulting package.
• Since you haven’t delivered the service yet, you list the payment as a liability called Unearned Revenue. As you provide the service each month, you move that amount into actual revenue.

Key Takeaway

• Accrual: If you’ve earned it or used it — record it now, even if no money has changed hands.
• Deferral: If you’ve paid or received money — but haven’t earned or used it yet — wait to record it.

Understanding Accrual and Deferral is critical for managing your business's finances and passing your next accounting exam.  These strategies guarantee that your financial statements tell the whole picture, not simply your bank balance.

Whether you’re preparing taxes, balancing the books, or building a budget, knowing when and how to record transactions is key to financial success.