What is the difference between accrual accounting and deferral?

Question

What is the difference between accrual accounting and deferral?

Answer 1

Are you sure you know what you are asking?  The question is typically  - what is the difference between accrual accounting and cash accounting?  I've been practicing accounting for over 20 years, and there's no such thing as deferral accounting.  Now, you can have deferred assets and deferred liabilities.

Answer 2

Jamie is correct that it is usually cash basis and accrual basis accounting.

Cash basis is what most non-business individuals use - income is "recognized" (recorded or reported as income) at the same time it is "realized" (the cash is received) and expenses are recoginzed when the cash is paid.

Accrual basis accounting recognizes revenue when it is earned (the services are provided to the customer or the goods are sold to the customer) rather than when the cash is received. Expenses are recognized in the accounting period when a resource (such as supplies or electricity) are actually consumed rather than when cash is paid.

For example, we consumed electricity in June, but pay for it in July. Under the accrual basis, the expense is "accrued" and reported in June (along with a liability which is an obligation to pay for the electricity). In July, cash is paid and the liability is reduced. Expense is not recorded in July because it was already recorded in June.

Under the cash basis, the revenue would be recognized and recorded when the cash is received in July. We would not use an accounts receivable account because nothing would be entered on the books until we received cash. You can see that the cash method would make it difficult to keep track of credit sales and amounts owed to the business if the cash basis is used.

We also have "deferrals" under an accrual basis. Suppose we bought supplies in June and paid cash for them at the time of purchase, but did not use them until July. Under the accural basis, we would record the supplies as an asset (a resource that will provide benefits in the future) and the payment of cash (but no expense, because we did not consume any of the supplies). We record the expense (and reduce the asset) in July when we actually use them. That is, we have "deferred" recognition of the expense until the supplies were actually used.

Under the cash basis, the expense for supplies would be recognized in June when the cash payment for the supplies was paid.

Accrual means we recognize revenue that has been earned and expenses (resources that have been consumed) for which cash will be received or paid in a future period.

Deferral means we have received cash or paid cash for something we will do for a customer or for a resource that we will consume in a future period.

On the other hand (and this is tongue in cheek) deferral accounting might refer to what some of my clients do - which is to defer (put off) doing the accounting (recording the transactions in the books) until it is time to do the tax return (grin).