Accounting is a complex topic that has to consider various time periods and concepts to keep track of financial transactions both in cash and in credit. Accrual and deferral concepts are used for dealing with accumulating and future transactions that have to be kept in mind while making deals.
Accruals vs Deferrals
The main difference between accruals and deferrals is that accruals refer to the payments that will be received in the future but which have been added together for a period of time whereas deferrals refer to the expenses or incomes that have become due but will be paid off in the future.
The accrual concept in finance refers to the practice of recording transactions when they are made instead of when they are paid for. Accruals involve adding together sums over a period of time until they are paid for. Accrued income refers to income for which work has been done but payment is left.
Deferrals refer to the incomes or expenses that have to be carried forward to the future and paid later even if they are having an effect in the present. These also add sums over a period and they will become due in the later accounting periods. Taxes are deferrals in nature because they add on and become payable at the end of the year.
Comparison Table Between Accruals and Deferrals
| Parameters of Comparison | Accruals | Deferrals |
| Meaning | Accruals refer to transactions that have been adding up in value and are now payable. | Deferrals refer to transactions that have to be delayed to a future date when they take effect. |
| Nature | Accruals are based on the prudence concept of accounting where expenses are considered but incomes are not. | Deferrals emphasize the cash aspect of accounting where even if payment is received, recording is done when work is done. |
| Accounting Treatment | These are recorded in the current period and are due beforehand. | These will be recorded in the next accounting period. |
| Analogy | If a person takes a loan then he doesn’t pay interest immediately but later on. | If advanced payments are received by a firm for work not supplied then it is recorded later when work is done. |
| Examples | Credit Purchases, Taxes, Rent in advance, and Interest on loan. | Deferred revenue expenditures, Advertisements, and Subscription-based services. |
What is Accruals?
Accruals refer to incomes or expenses that have been accumulating over time and which have become due in the current accounting period. This is done so that accounting transactions that have been accumulating and payments that are outstanding can be closed at the end of the accounting period.
An explanation of accruals can be given through accrued income, which refers to the income for which the work has been done but which has not yet been credited to the worker’s account. It is due to them and will be paid in the accounting period.
Accruals are considered because they affect the position and business of a company even though money has not been exchanged since work is actively involved and stock transfer might also be involved in the transaction. They are necessary to keep track of financial activities which otherwise would be ignored due to lack of cash transfer.
Accruals function under the accrual concept of accounting which states that incomes and expenses are recorded in the books of accounts irrespective of the fact whether payment has been made in their regards or not. They are cleared by paying or receiving payment at the end of the accounting period or contract.
What is Deferrals?
Deferrals refer to the transactions which although have taken place in the present time but will be recognized at some date in the future which depends upon the business. They are made so that the financial statements being publicized by the business are more accurate in representing their financial and overall situation.
Deferrals are the payments received in advance that will affect the business in the future therefore they aren’t included in the current year. It also includes expenses that have been paid for but which have not become due in the current period. They facilitate accurate tracking of payments by limiting them to the time they are actually made or received.
An example of a deferral would be prepaid rent in which case the rent has not become due in the present time but a tenant pays it prematurely. This is a deferral for the landlord since he hasn’t lent the service of his house but still received the money.
Deferrals also function under the accrual concept of accounting and facilitate accurate maintenance of financial records since a receipt has to be noted even if work is still due and it will be brought into term later. Other examples of deferrals include subscriptions, product deposits, advanced income, prepaid bills, etc.
Main Differences Between Accruals and Deferrals
- Accruals refer to payments or incomes that have been carried forward to the present whereas deferrals refer to carrying incomes and expenses to the future.
- Accrued expenses refer to the payments that a company has to make in the present whereas deferred expenses refer to the expenses that have been paid in advance.
- Accrued incomes are the payments that are still to be received for work already done therefore they are assets whereas deferred incomes are received for undone work.
- In deferrals, money is exchanged first whereas in accruals, money is involved later and work is done first.
- Accruals lead to increase in assets and decrease in costs whereas deferrals lead to increase in liabilities and cost.
Conclusion
Accounting has to follow many standard practices that make records uniform and easily understandable. One of these accounting standards is to do accounting on an accrual basis in which the unpaid expenses unearned incomes are recorded as liabilities and the prepaid expenses and incomes received in advance are recorded as assets in the balance sheet.
The objective of using the accrual basis is to have a correct valuation of inventory and dealings even if cash was not involved since these also affect a business equally because the dealers might back off if no written proof is available for a transaction and also for maintaining transparency.
References
- https://www.elibrary.imf.org/view/journals/005/2009/002/article-A001-en.xml
- https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/taxlr38§ion=21