Accrual and deferral PDF

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Accrual and deferral definition...

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WHAT IS THE DIFFERENCE BETWEEN ACCRUALS AND DEFERRALS? An accrual: - Expenses that should be reported now, but have not yet been recorded or paid - Revenues that should be reported now, but have not yet been recorded nor has the money Example of an expense accrual. The accrual of an expense refers to the reporting of an expense and the related liability in an accounting period that is prior to the period when the amount will be paid or the invoice will be processes. The electricity that is used in December where neither the bill or the payment will be processed until January is an example of an expense accrual. The December electricity should be recorded as of December 31 with an accrual adjusting entry that debits Electricity Expense and credits a liability account such as Accrued Expenses Payable. Much like accrued revenue, accrued expenses are noted at the time they occur, regardless of whether your business has paid them. For example, you know that you have to pay employees at the end of the month before you actually write checks. The expense is entered into an accrued expenses account as a liability, then when your business writes employee checks, the accrued expense is zeroed out and cash assets decrease. Accrued revenue is entered into an accounting journal once the revenue is earned regardless of whether a business has received the physical cash. For instance, if your business performs a service for a client, you have earned the revenue for that service. Before you receive the cash, the revenue is entered into an accrued revenue account. After you receive cash from your client, the accrued revenue account is decreased by the amount of cash received. Example of a revenue accrual. The accrual of revenues refers to the reporting of revenue an the related asset in the period in which they are earned, and which is prior to processing a sales invoice or receiving the money. An example of the accrual of revenues is a bond investment interest that is earned in December but the money will not be received until a later accounting period. The interest should be recorded as of December 31 with an accrual adjusting entry that debits Interest Receivable and credits Interest Income. A deferral: - Paid out money that should be reported as an expense in a later accounting period - Received money that should be reported as revenue in a later accounting period Example of an expense deferral. A deferral of an expense involves a payment that was paid in advance of the accounting period in which it will become an expense. An example is a payment made in December for a property insurance covering the next six months of January through June. The amount that is not yet expired would be reported as a current asset such as Prepaid Insurance or Prepaid Expenses. The amount that expires in an accounting period should be reported as Insurance Expense. Deferred expenses are spread out over the period to which they apply. When you prepay expenses -- for rent or other items -- the entire sum is taken from your assets. For example, if you pay $6,000 for six months of rent upfront, you put the $6,000 into a deferred expense account and debit the account $1,000 each month for six months. Deferring expenses helps businesses keep track of their expense cash flows and gives a more accurate picture of quarterly performance. Example of a revenue deferral. A deferral of revenues involves money that was received in advance of earning it. An example is the insurance company receiving money in December for providing insurance protection for the next six months. Until the money is earned, the insurance company should report the unearned amount as a current liability

such as unearned Insurance Premiums. As the insurance premiums are earned, they should be reported on the income statement as Insurance Premium Revenues. Revenue deferrals are used by accountants to spread out revenue over time. For example, your business may enter into an agreement with a client to perform a service over a period of time. However, the client may pay you the entire amount for the service up front. If this occurs, you would enter the lump payment into a deferred revenue account and spread the revenue over the fiscal period. For instance, if a customer pays $100 upfront for two months of service, you would put the $100 into a deferred revenue account and subtract $50 from the account each month. The subtracted amounts would go to your company's cash holdings....