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
