Accrual vs deferral
Each, defined
Accrual
Accrual — An expense incurred, or revenue earned, before it is invoiced — recorded at period end so it lands in the right period.
Deferral
Deferral — Cash paid or received ahead of the expense or revenue it relates to, held on the balance sheet — as a prepaid or deferred revenue — until consumed or earned.
Side by side
| Accrual | Deferral | |
|---|---|---|
| Recognition | Before cash | After cash |
| Accounts created | Accrued revenue, accrued expenses | Prepaid expenses, deferred revenue |
| Typical treatment | Often reversed next month | Released by a schedule |
How they relate
Accruals and deferrals are the two adjusting entries that make accrual accounting work. Both move an amount between the balance sheet and the P&L so that a month shows what it earned and what it used.
Four accounts cover almost every case: accrued revenue and accrued expenses on the accrual side, prepaid expenses and deferred revenue on the deferral side.
Questions
- Which one gets reversed?
- Accruals often are, so the bill or invoice can be booked normally next month. Deferrals are released by a schedule and are not reversed.
- What is a simple example of each?
- Accrual: December's unbilled consulting work. Deferral: a year of insurance paid in January.
See it computed
Worked through: the calculators, the journal entries and the tools that use these terms.
- Journal entry for accrued expensesAt month-end, debit the expense and credit Accrued expenses for work received but not yet billed. Reverse the accrual on the first day of the next month, then book the vendor's bill as usual when it arrives.Entry
- Journal entry for prepaid insuranceWhen the premium is paid, debit Prepaid insurance and credit Cash. At each month-end, debit Insurance expense and credit Prepaid insurance for the month's share of the policy, until the prepaid balance reaches zero.Entry
- Journal entry for deferred revenueWhen an annual contract is invoiced up front, debit Accounts receivable and credit Deferred revenue. As each month of service is delivered, debit Deferred revenue and credit Revenue for that month's share.Entry
- Journal entry for accrued revenueAt month-end, debit Unbilled receivables and credit Revenue for work delivered but not yet invoiced. When the invoice goes out, debit Accounts receivable and credit Unbilled receivables.Entry
Definitions are the glossary’s, generated from the same documents. Figures in the examples are computed by tested functions, not typed. General information for US companies under US GAAP, not accounting or tax advice.