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Accruals and Deferrals

Accruals and deferrals are adjusting entries that ensure revenue and expenses are recorded in the correct period.

Accruals

Record revenues earned or expenses incurred before cash is exchanged.

Accrued Revenue

  • Work completed but not yet billed
  • Interest earned but not received
  • Rent income earned but not collected

Accrued Expenses

  • Utilities used but not yet billed
  • Wages earned but not yet paid
  • Interest owed but not yet paid
  • Taxes owed but not yet paid

Deferrals

Adjust for cash exchanged before revenue is earned or expense is incurred.

Deferred Revenue (Unearned Revenue)

  • Customer prepayments
  • Subscription fees received in advance
  • Deposits for future services

Deferred Expenses (Prepaid Expenses)

  • Insurance paid in advance
  • Rent paid in advance
  • Annual software licenses
  • Prepaid supplies

Why They Matter

  • Ensure financial statements reflect economic reality
  • Match revenues with related expenses
  • Comply with accrual accounting principles
  • Provide accurate profit measurement

Next Steps

Learn about depreciation and how to allocate asset costs over time.