Accrual vs. deferral in accounting: Differences and examples

Accruals and deferrals are key concepts in accrual accounting, which recognizes revenues and expenses when they happen rather than when cash changes hands. They help ensure your financial statements accurately reflect your business's financial health during a specific period.

For example, if you provide a service in December but aren't paid until January, you'd still record it in December as accrued revenue. If you receive payment in advance for a service you'll deliver later, you'd record that payment as deferred revenue until the service is complete.

What is the difference between accruals and deferrals?

The core distinction between accruals and deferrals comes down to timing. Accruals recognize transactions before cash moves, while deferrals recognize them after.

• Accruals record revenue or expenses before payment occurs; deferrals record them after payment occurs
• Both are adjusting entries used to align financial statements with the matching principle
• Both exist for revenue and expenses

What are accruals in accounting?

With an accrual, you record a transaction on your financial statement as a debit or credit before actually making or receiving the payment. By recognizing revenue earned or expenses incurred ahead of the transaction, you gain a more precise, forward-looking perspective on your finances.

This helps you make better operational adjustments and supports compliance with the matching principle, which requires that expenses be recorded in the same period as the revenue they help generate.

In accounting, you typically divide accruals into two main categories: revenue and expenses.

Accrued revenue

Accrued revenue refers to income your business earns by selling a product or service for which you haven't received payment yet. For example, if you've completed a service or issued a loan and expect an interest payment to arrive later, you can record the expected amount as accrued revenue for the current accounting period.

Accrued expenses

Accrued expenses are payments or liabilities you record before processing the transactions. For example, if your business receives a utility bill in January for electricity used in December, you'd record that cost as an accrued expense in December.

Likewise, you'll often categorize employee salaries and wages as current liabilities and document them as accrued expenses on your balance sheet.

What are deferrals in accounting?

A deferral or advance payment occurs when you pay for a product or service in the current accounting period but record it after delivery. Deferral accounting improves accuracy and helps you lower current liabilities on your balance sheet. As with accruals, you divide deferrals into revenue and expenses.

Deferred revenue

Deferred revenue refers to payments you receive for products or services but don't record until after you deliver them.

If a customer pays $60 in December for a 6-month subscription at $10 per month, you record the initial $10 on the income statement for the first month. You'll defer the remaining $50 to a later accounting period, typically at year-end or whichever period aligns with the subscription's expiration date.

Deferred expenses

Deferred expenses are payments to a third party for products or services recorded upon delivery. One example is a prepaid insurance policy. If you prepay $1,200 for a 12-month policy at $100 monthly, you only recognize $100 as an expense for the current accounting period and defer the remaining $1,100.

This approach to adjusting entries enables you to lower future liabilities by paying for services beforehand. It also enhances the accuracy of monitoring business expenses according to the specific times when vendors provided services or delivered products.

How to record accruals and deferrals

Both accruals and deferrals require adjusting journal entries, typically made at period-end to ensure accurate financial statements. These entries are reversed or adjusted in subsequent periods when cash moves.

All publicly traded businesses must follow the generally accepted accounting principles (GAAP) established by the Financial Accounting Standards Board (FASB), which require the use of accrual basis accounting. Even if you're not publicly traded, following these standards gives you a clearer picture of your financial position.

Journal entries for accrued expenses

Accrued expenses appear on the liabilities side of the balance sheet. Once you pay the expense, you remove the liability. This helps you clearly view all current assets and liabilities, avoiding inflated profits or understated debt.

To record an accrued expense:

• Debit: Expense account (increases expense on income statement)
• Credit: Accrued liabilities or accounts payable (increases liability on balance sheet)

Suppose your company receives a utility bill for $1,000 in January for electricity you used in December. Since you used the service in December, you record the cost as an accrued expense for that period even though you haven't made the payment yet.

Once you pay the bill, update the entry to remove the liability and reflect the cash outflow:

Journal entries for accrued revenue

Accrued revenue captures income you've earned but haven't yet invoiced or collected. You record it as an asset (accounts receivable) because the customer owes you for work already performed.

To record accrued revenue:

• Debit: Accounts receivable (increases asset)
• Credit: Revenue (increases income)

Say your consulting firm completes a $5,000 project in December but won't send the invoice until January. You'd record the revenue in December to match it to the period when you performed the work.

When the client pays in January, you remove the receivable and record the cash:

Journal entries for deferred expenses

Deferred expenses treat completed payments as assets and convert them to expenses later as you consume the benefit. This approach lets you accurately track costs against the periods when you actually use the service or product.

To record a deferred expense:

• Initial payment: Debit prepaid asset, Credit cash
• Adjusting entry: Debit expense, Credit prepaid asset (as benefit is consumed)

Say you prepay $1,200 for a 12-month insurance policy at $100 monthly. At the time of payment, record the full amount as a prepaid asset:

At the close of each month, report $100 as an insurance expense and decrease the prepaid insurance account by the same amount:

Repeat this process until the prepaid balance is fully expensed.

Journal entries for deferred revenue

Deferred revenue represents cash you've received before delivering the goods or services. It sits on your balance sheet as a current liability (unearned revenue) because you still owe the customer something.

To record deferred revenue:

• Initial receipt: Debit cash, Credit unearned revenue (liability)
• Adjusting entry: Debit unearned revenue, Credit revenue (as service is delivered)

Say a customer pays $1,200 up front for a 12-month software subscription at $100 per month. At the time of payment, record the full amount as unearned revenue:

Each month, as you deliver the service, recognize $100 of revenue and reduce the unearned revenue liability:

Why accruals and deferrals matter for financial reporting

Accruals and deferrals ensure compliance with GAAP's matching principle—expenses align with related revenue in the same period. Without them, your financial statements can misstate profitability by recording income or costs in the wrong period, which creates problems for investors, auditors, and lenders.

Misclassifying an accrual as a deferral (or vice versa) can trigger audit findings and even require financial restatements. Proper use of both gives you:

• Accurate profit measurement: Revenue and related expenses appear in the same period, so your margins reflect actual performance
• Reliable financial statements: Stakeholders see your true financial position, not just cash timing
• Audit readiness: Proper adjusting entries support clean audits and regulatory compliance
• Better decision-making: Your finance team can analyze actual performance rather than cash flow fluctuations

While many small businesses may initially prefer simple cash accounting, which records revenues and expenses when cash changes hands, this method doesn't give you the full picture. Accrual and deferral accounting shows you when your business actually earns revenue and incurs expenses, which makes it much easier to assess performance and plan for growth.

GAAP only requires accrual basis accounting for publicly traded corporations. But as a small business or startup, you may struggle to attract investors without the insights that accrual and deferral methods provide. Cash accounting might show an uptick in sales, but it won't tell you whether those trends are sustainable.

Automate accruals and deferrals with Ramp's Accounting Agent

Accruals and deferrals demand precision. One missed reversal or misaligned period throws off your financials and creates extra work at close. When you're manually tracking dozens of entries across months, errors slip through and corrections pile up.

Ramp's Accounting Agent handles the repetitive work so you can focus on high-value financial analysis. It auto-codes transactions using historical patterns and transaction details, flags exceptions for review, and posts routine items directly to your ERP with minimal input.

Ramp's Accounting Agent fits directly into your accrual and deferral workflows:

• Automate your accrual journal entries: Consolidated accruals are created, posted, and auto-reversed at period-end across NetSuite, Sage Intacct, QuickBooks Online, Dynamics, and more
• Code transactions across all fields: GL accounts, departments, classes, and locations are assigned based on your historical patterns—no manual tagging required
• Improve accuracy over time: Manual corrections decline by an average of 70% within the first month as the agent learns from your feedback and accounting logic
• Post high-confidence items automatically: Routine transactions route straight to your accounting system, with 98% accuracy on transactions deemed "ready to sync"

Try an interactive demo to learn how Ramp's Accounting Agent can cut manual work from your close process.