Differentiate accruals and deferrals with an example of each in accounting.

Differentiate accruals and deferrals with an example of each in accounting.

• A. Accruals recognize revenue or expense before cash changes hands; deferrals delay recognition until future periods. Examples: accrued wages (expense), unearned revenue (revenue); prepaid insurance (deferral).
• B. Accruals are recorded only at year-end; deferrals are recorded quarterly.
• C. Accruals and deferrals are the same concept; no difference.
• D. Accruals involve cash receipts; deferrals involve cash payments.

Answer: (A)

The idea being tested is how timing of recognition versus cash movements defines accruals and deferrals. In accruals, you recognize revenues and expenses when they’re earned or incurred, even if cash hasn’t moved yet. A common example is wages expense recognized now when employees earn them, with a liability created for future payment. Revenue that’s earned but not yet received would also be an accrual. Deferrals, on the other hand, delay recognition because cash has already changed hands. You prepay for something or receive cash before delivering goods or services, so you record an asset or a liability and then recognize the revenue or expense in a future period—such as prepaid insurance (prepaid asset that becomes an expense over time) or unearned revenue (cash received but revenue recognized later). This framing matches the choice by stating accruals recognize before cash moves and deferrals postpone recognition, with those concrete examples. The other statements mix up timing, frequency, or cash involvement and don’t reflect these fundamental distinctions.

The idea being tested is how timing of recognition versus cash movements defines accruals and deferrals. In accruals, you recognize revenues and expenses when they’re earned or incurred, even if cash hasn’t moved yet. A common example is wages expense recognized now when employees earn them, with a liability created for future payment. Revenue that’s earned but not yet received would also be an accrual. Deferrals, on the other hand, delay recognition because cash has already changed hands. You prepay for something or receive cash before delivering goods or services, so you record an asset or a liability and then recognize the revenue or expense in a future period—such as prepaid insurance (prepaid asset that becomes an expense over time) or unearned revenue (cash received but revenue recognized later). This framing matches the choice by stating accruals recognize before cash moves and deferrals postpone recognition, with those concrete examples. The other statements mix up timing, frequency, or cash involvement and don’t reflect these fundamental distinctions.