Difference between Accrual and Deferral

Accrual and deferral are accounting concepts that refer to the timing of recognizing revenues and expenses in financial statements. The main difference between accrual and deferral is when the recognition of revenue or expense occurs.

Accrual:

Accrual accounting recognizes revenue and expenses when they are earned or incurred, regardless of when the actual cash flow takes place.

This means that revenue is recorded when it is earned, and expenses are recorded when they are incurred, regardless of whether cash has been received or paid.

Accrual accounting follows the matching principle, which aims to match revenues with the expenses incurred to generate those revenues during the same accounting period.

Example: Assume a business gives services to a customer in December but does not receive payment until the following January. Even if the payment is received in January, revenue is recognized in December under accrual accounting when the service is performed.

Deferral:

Deferral accounting, also known as cash basis accounting, recognizes revenue and expenses when the associated cash flow occurs.

In this method, revenue is recorded when cash is received, and expenses are recorded when cash is paid.

Deferral accounting does not follow the matching principle as it does not attempt to match revenues with the expenses incurred in the same accounting period.

Example: Using the identical example as before, revenue would be recognised in January when the payment is received, rather than in December when the service was performed, under deferral accounting.

In summary, the key difference between accrual and deferral is that accrual accounting recognizes revenue and expenses when they are earned or incurred, regardless of the timing of cash flows, while deferral accounting recognizes revenue and expenses when the associated cash flows occur.
Accrual accounting provides a more accurate representation of a company’s financial performance, while deferral accounting provides a simplified approach based on cash transactions.