An accrual results when revenue is earned or expenses are incurred but cash has not yet been received or paid. A deferral results when cash is received or paid before revenue is earned or expenses are incurred. Specifically:
- An accrual occurs when goods or services are delivered or consumed but payment happens later. For example, recording revenue before cash is received or recording expenses before payment is made.
- A deferral occurs when cash is exchanged in advance, but the revenue or expense is recognized in a future accounting period. For example, prepaid expenses or unearned revenues that are initially recorded as assets or liabilities and then recognized as expenses or revenues over time.
This follows the accrual basis of accounting where transactions are recorded in the period they occur rather than when cash changes hands, ensuring proper matching of revenues and expenses.
