Accruals and Deferrals

Accruals
Accrued revenues and expenses are recognized before cash is received or paid.
Under accrual basis accounting, revenues are recognized when they are earned even if cash is not received yet. In this case, an accrued revenue is recognized.
Expenses that are recognized as they are incurred and cash is paid later are the accrued expenses.
Revenue recognized on credit sales is an example of an accrued revenue, because cash will be collected later.
Salaries expense recognized during the current period when the payment is made in the following period is an example of an accrued expense.
Deferrals
Deferred revenues and expenses are recognized after cash is received or paid. In the case of a deferred revenue, revenue recognition is deferred until revenue is earned even if cash has been received.
For a deferred expense, expense is recognized later while cash payment is made now. Unearned subscription revenue is an example of deferred revenue.
When subscribers to a magazine pay in advance for a year, the cash receipt is recorded as unearned subscription revenue, which is a liability account.
As each issue of magazine is sent to the subscriber, subscription revenue is recognized and the unearned subscription revenue account decreases.
Prepaid rent expense is an example of a deferred expense.
When then entity pays a one-year rent at the beginning of the lease period, the cash payment if recorded as prepaid rent expense, which is an asset account.
At the end of each month, rent expense is recognized and the prepaid rent expense account decreases.





 

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