Deferrals and Accruals

Dictionary meaning of Deferrals is Delays, Postponements and the dictionary meaning of Accruals is Accumulations, Additions etc. Inline with these meanings, I am going to explain these terms in conjunction with two other terms, namely COSTS / EXPENSE and REVENUE / INCOME.
 I am actually going to show the double entry for both, as eventually everything boils to that only and that's what matters in the end!

Deferred Cost and Accrued Cost

Deferred Cost

Deferred Cost / Expense can be any expense which is paid in advance or a purchase made in advance. This literally means that you are deferring (Delaying) the entry in actual cost account in general ledger, as the timing for booking the cost does not match the event. But since you are making that cost, it has to be recorded somewhere in the books and that's where the Deferred Cost / Expense account comes into picture. Deferred Cost / Expense account can be  Prepaid Insurance, Prepaid Rent etc.

Now the cost has already hit the cash / bank account, but the actual cost has not been booked in the account that is specifically selected for that purpose. For e.g. Rent. Insurance etc. So how does this work. Suppose you have made the prepayment for the entire year for Insurance and you want to book the cost of that insurance expense every month. In this case, you pass an entry for the Prepaid Insurance and then reverse the deferrals each month. Enough of talk, lets do the double entry:

In the beginning of the year the entire insurance amount is paid:

DR Prepaid Insurance         1200 INR
      CR   Bank                                      1200 INR

Then in each month, following entry is made hitting the actual expense account:

DR Insurance Expense        100 INR
       CR Prepaid Insurance                  100 INR

In this way the entire deferral amount is cleared by the year end the appropriate expense is booked in the actual expense account at the appropriate time.

In effect the entry after the Prepaid Insurance is knocked off, is:

DR Insurance Expense        1200 INR
       CR Bank                                        1200 INR

Remember : Deferred Cost account is an Asset account.

Accrued Cost (Cost Accruals)

Cost Accruals is nothing but a provision made so that the accounting is accurate and the financial statements reflect the actual picture. There are certain scenarios where the cost has to be accrued.

For e.g. Year end is 31st Dec, but the salary day is 5th of every month, then for the accounts to reflect the correct figures the cost will have to be accrued on 31st of Dec. The entries will be as follows:

DR Wages Expense       100,000 INR
     CR Wages Payable                      100,000 INR ( Cost Accrual)

On the salary day,

DR Wages Payable       100,000 INR (Accrual Reversal)
      CR Bank                                     100,000 INR

In-effect the entry after the Wages Payable is knocked off, is:

DR Wages Expense       100,000 INR
      CR Bank                                     100,000 INR

Remember : Accrued Cost is a Liability account.

Deferred Revenue and Accrued Revenue

These terms are exactly the opposite of what is explained above.

Deferred Revenue

Deferred Revenue is the revenue which is received in advance. Hence while entering this in the books, it should be entered in such a fashion so that the picture that the financial statements display should be neat and accurate. Example of Deferred Revenue is Advance Payment. The double entry for this will be:

DR Bank           50,000 INR
      CR Deferred Revenue (Pre-payment)  50,000 INR

However when the work / service is delivered in parts or in whole, then accordingly the actual revenue will be recognized. The entry for it will be as follows:

DR Deferred Revenue    10,000 INR (1)
      CR Revenue                          10,000 INR (1)

DR Deferred Revenue    10,000 INR (2)
      CR Revenue                          10,000 INR (2)
.
.
.
DR Deferred Revenue    10,000 INR (5)
      CR Revenue                          10,000 INR (5)

This is how the revenue will be recognized in parts as and when the work / service gets delivered. And if it is decided that the revenue is to be recognized at the end of the work / project, then only one entry will be passed .i.e.:

DR Deferred Revenue    50,000 INR
      CR Revenue                          50,000 INR

In effect the entry after the Deferred Revenue is knocked off, is:

DR Bank       50,000 INR
       CR Revenue 50,000 INR

Remember : Deferred Revenue is a Liability Account.

Accrued Revenue (Revenue Accruals)

The need for the Revenue Accruals arises when the revenue (amount) in theory should have hit the bank account, but has still not. But from the standpoint of accurate accounting (matching principle)
for the given period the appropriate provision should be made to reflect the actual revenue for that period, even if the bank has still not received the money. The entry will be as follows:

DR Accrued Revenue       30,000 INR
      CR Revenue                                  30,000 INR

Now when the money starts hitting the bank account; either periodically or in lump-sum, the Accrued Revenue will be reversed.

DR Bank      10,000 INR (1)
CR Accrued Revenue     10,000 INR (1)
.
.
DR Bank      10,000 INR (3)
CR Accrued Revenue     10,000 INR (3)

OR if all the revenue is to be recognized all at once, then:

DR Bank      30,000 INR
CR Accrued Revenue     30,000 INR

In effect the entry after the Accrued Revenue is knocked off, is:

DR Bank       30,000 INR
       CR Revenue 30,000 INR

Remember : Accrued Revenue is an Asset Account.

Thanks !

AXAPTAMANIAC