For those who are away from the world of accounting, accrual and deferral may sound like foreign words. But those who are accountants or keep books for an organization know the importance of these two concepts in any accrual based accounting procedure. This accounting recognizes events whether they are accrual or deferral irrespective of the time when cash is received or spent (given to someone). An accrual is the recognition of the revenue or expense before cash is received or paid. Deferral is just the opposite of accrual and refers to the recognition of the event after cash has been received or paid. There are other differences also that will be discussed in this article.
So recognition of events in books before cash flow is known as accruals whereas recognition of events after cash flow is referred to as deferrals. Revenue recognition is the basic principle of accrual accounting and there are two ways to recognize revenues. They can be recognized when they are realized or when good or services have been delivered or rendered. Accrual accounting is just the opposite of cash accounting where revenue recognition is done only when cash is received or payment made irrespective of time when goods or services are rendered.
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In brief: Difference Between Accrual and Deferral • Accrual is recognition of revenues and it leads to cash receipt or expenditure. • So accrual revenue refers to recognition of revenue that has been earned but not yet received. Similarly accrual expense is recognition of expense that has been incurred but the payment has yet not been made. • On the contrary, deferral is recognition of receipts and payments after actual cash transactions. So in the case of deferral revenue you receive the cash but its recognition is done later. • Similarly, you pay out cash to cover for wages of employees but recognize it later in your books.
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