Lesson 11 - Intermediate Accounting Course 

11. Accrual vs. Deferral Adjustments: A Deeper Look

Accounting is based on the accrual principle, meaning revenues and expenses are recognized when they are earned or incurred, not necessarily when cash is exchanged. To properly match income and expenses to the correct period, accountants use two types of adjusting entries: accruals and deferrals.

1. Accrual Adjustments

Accrual adjustments recognize revenues earned or expenses incurred before cash is received or paid. These are necessary when transactions happen before money changes hands.

🔹 Accrued Revenues (Receivables)

• Revenue that has been earned but not yet received in cash.

• Recorded as accounts receivable on the balance sheet.

• Example: A consulting firm completes a project in December but invoices the client in January. The revenue must be recorded in December’s financials.

🔹 Accrued Expenses (Payables)

• Expenses that have been incurred but not yet paid in cash.

• Recorded as accounts payable or accrued liabilities.

• Example: A company uses electricity in December but gets the bill in January. The expense should still be recorded in December.

📌 Why It Matters:

• Ensures financial statements reflect the true financial position of the company.

• Without accruals, revenues and expenses would be understated, leading to misleading financial analysis.

2. Deferral Adjustments

Deferrals occur when cash is received or paid before revenue is earned or expenses are incurred. This means the transaction happens before it affects the income statement.

🔹 Deferred Revenues (Unearned Revenue)

• When a company receives cash in advance for services or goods to be delivered later.

• Initially recorded as a liability (unearned revenue).

• Example: A gym collects a 1-year membership fee upfront in January. The revenue must be recognized gradually each month, not all at once.

🔹 Deferred Expenses (Prepaid Expenses)

• When a company pays for expenses in advance of using them.

• Initially recorded as an asset (prepaid expense) and gradually expensed over time.

• Example: A business prepays rent for six months. Each month, a portion of the rent is moved from “Prepaid Rent” (asset) to “Rent Expense.”

📌 Why It Matters:

• Ensures expenses and revenues are recorded in the correct periods.

• Helps businesses avoid overstating or understating income in any given period.

Key Differences: Accrual vs. Deferral

Final Thoughts

Accrual and deferral adjustments are essential for ensuring that financial statements accurately reflect a company’s performance. Without them:
✅ Accruals prevent missing revenues or expenses that should be reported.
✅ Deferrals prevent premature recognition of income or costs.

Mastering these concepts helps businesses maintain accurate, transparent, and regulatory-compliant financial records.