Accrual vs Deferral: Differences, Examples & Journal Entries

Accruals and deferrals both deal with the same accounting problem: cash and economic activity do not always happen in the same period.

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Sometimes a company earns revenue or incurs a cost before the related cash moves. Other times, cash changes hands before the revenue is earned or the expense belongs on the income statement. Accruals and deferrals help put those transactions in the periods they actually relate to.

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Accrual vs. deferral: What's the difference?

With an accrual, the company has already earned revenue or incurred an expense, but the corresponding cash transaction happens later.

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With a deferral, cash has already been received or paid, but some or all of the revenue or expense belongs to a future period.

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Accruals and deferrals are not competing accounting methods. They are the two main types of adjusting entries used under accrual accounting to keep the income statement aligned with what occurred during the reporting period [1].

What is an accrual?

An accrual records revenue or an expense in the period it was earned or incurred even though the related cash transaction has not happened yet.

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The balance created depends on which side of the income statement is involved.

Accrued revenue

Accrued revenue is revenue a company has earned but has not yet billed or collected. Once the customer is invoiced, the amount is ordinarily tracked in accounts receivable.

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Suppose a consulting company completes work in January but will not bill the customer until February. The revenue belongs in January because that is when the work was performed.

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The January entry records revenue along with an asset representing the company's right to payment.

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Under ASC 606, the precise classification of that asset depends on the company's right to payment. A contract asset exists while that right is conditional on something other than the passage of time. 

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Once only the passage of time remains before payment is due, the amount is a receivable, even if the customer has not been invoiced yet, as defined in FASB's revenue recognition guidance (ASC 606-10-45-4) [2].

Accrued expenses

An accrued expense is a cost the company has already incurred but has not yet paid or, often, received an invoice for.

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For example, a company may consume $12,000 of cloud infrastructure during January even though the provider does not send the invoice until February. The January financial statements still need to include the $12,000 expense.

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The corresponding credit creates an accrued liability representing what the company owes.

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Payroll, professional services, utilities, interest, cloud infrastructure, and contractor costs can all create expense accruals when the service period and billing period do not line up.

What is a deferral in accounting?

A deferral starts with the opposite timing pattern. Cash moves before the related revenue or expense belongs on the income statement.

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Instead of recognizing the full amount immediately, the company initially records an asset or liability on the balance sheet.

Deferred revenue

Deferred revenue occurs when a company receives payment before it has earned the corresponding revenue.

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Imagine a customer pays $12,000 on January 1 for a 12-month software subscription. Receiving the cash does not mean the company has earned $12,000 of revenue in January.

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At the start of the contract, the $12,000 is recorded as deferred revenue, a liability representing the company's remaining obligation to provide the service. As the service is delivered, amounts move out of the liability and into revenue.

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Under ASC 606-10-45-2, a contract liability exists when a customer has paid, or payment is due, before the company transfers the related goods or services [2].

Prepaid expenses

A prepaid expense is the expense-side version of a deferral.

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Suppose a company pays $12,000 upfront for a one-year software contract. The payment creates a prepaid asset because the company has not yet consumed the full 12 months of service.

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If the benefit is consumed evenly, $1,000 moves from the prepaid asset to software expense each month. This prevents the company from reporting the entire annual cost in January when the software will support operations throughout the year.

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The same idea applies to insurance, licenses, maintenance contracts, and other costs paid before the benefit is received. Rent paid in advance works this way for short-term leases a company has elected to keep off the balance sheet, but for leases recorded on the balance sheet under ASC 842, prepaid rent becomes part of the right-of-use asset (ASC 842-20-30-5(b)) rather than a separate prepaid expense [3].

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There is also a useful symmetry here. If one company prepays $12,000 for a year of SaaS, the buyer may record a prepaid expense while the seller records deferred revenue. The same payment produces different balance-sheet accounts because each company is accounting for its side of the transaction.

How to record accruals and deferrals

Accruals and deferrals commonly require general ledger adjustments so revenue and expenses appear in the correct accounting periods.

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The four basic patterns are accrued revenue, accrued expenses, deferred revenue, and prepaid expenses.

Accrued revenue journal entry

Assume a company completes $12,000 of work in January that will be billed in February.

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January

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The company records the revenue in January because that is when it was earned.

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When the amount is subsequently moved into accounts receivable:

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February

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This second entry changes the balance-sheet classification rather than recognizing another $12,000 of revenue. The exact account used for the initial asset depends on the company's contractual right to payment. 

Accrued expense journal entry

Now suppose a company consumes $12,000 of hosting services in January but receives the invoice in February.

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January

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The expense appears in January even though the invoice has not arrived.

When the vendor invoice is recorded:

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February

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The company can then clear accounts payable when it pays the vendor.

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Some finance teams instead configure certain expense accruals to reverse automatically at the beginning of the following period and record the vendor invoice through the normal AP process. Reversing entries are an optional step in the accounting cycle [4], so this is a workflow choice, not a rule that applies to every accrual.

Deferred revenue journal entry

Assume a customer pays $12,000 on January 1 for 12 months of service.

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When the cash is received:

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If the service is recognized evenly at $1,000 per month, the January entry is:

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The remaining $11,000 stays on the balance sheet until the related service is delivered.

Prepaid expense journal entry

Suppose the company instead pays $12,000 upfront for a 12-month software contract.

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When it pays:

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After one month of use:

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The process continues according to the amortization schedule until the prepaid balance has been fully expensed.

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These entries are examples rather than universal templates. Contract terms, billing rights, usage patterns, estimates, materiality policies, and the company's chart of accounts can all affect the accounts and timing used.

What happens after an accrual or deferral is recorded?

An accrual generally remains until the related invoice, payment, collection, or other event provides the information needed to clear or reclassify it. Estimated accruals may also need to be trued up if the actual amount differs from the estimate.

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For accrued expenses, that may mean clearing the accrued liability against accounts payable when the invoice arrives. Some recurring accruals may instead be reversed automatically and replaced by the actual transaction.

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For accrued revenue, the next step is usually moving the unbilled balance into billed accounts receivable when the customer is invoiced. If the balance was a contract asset, it becomes a receivable once the right to payment is unconditional, which, as PwC's financial statement presentation guide notes, can happen before the customer is invoiced [5].

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A deferral follows a schedule based on when the associated revenue is earned or benefit is consumed. Deferred revenue moves into revenue as the company satisfies its obligations. Prepaid assets move into expense as the company receives the underlying benefit.

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That creates several common control problems during the close. An old accrual can remain on the balance sheet after the actual invoice has already been booked. An invoice can be recorded without clearing the related accrual, resulting in a duplicate expense. 

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Prepaid balances can keep sitting on the balance sheet after their benefit has expired, while deferred revenue can be recognized faster than the underlying service is delivered.

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The initial entry therefore needs a clear path to its eventual settlement, recognition, or reclassification.

How accruals and deferrals affect the month-end close

Accruals and deferrals are a recurring part of the month-end close process because period cutoffs rarely line up perfectly with billing and payment cycles.

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A finance team may finish January with services already consumed but no vendor invoice, customer work completed but not yet billed, annual expenses that still have months of benefit remaining, and customer payments covering services that will be delivered throughout the year.

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During the close, teams generally need to:

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• identify revenue and costs that cross the reporting cutoff;
• calculate and support required accruals;
• update prepaid and deferred revenue schedules;
• clear or true up accruals from earlier periods;
• record the current period's amortization and revenue recognition;
• reconcile supporting schedules to the general ledger; and
• investigate balances that have remained open longer than expected.

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The goal is not simply to post more entries. Finance also needs to make sure the balances carried into the next period can still be explained, supported, and reconciled.

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Companies may establish materiality thresholds so teams do not spend close time accruing immaterial amounts. Those thresholds are internal accounting policies rather than a universal dollar limit that applies to every business, and the SEC staff has cautioned, in Staff Accounting Bulletin No. 99, that an item is not immaterial simply because it falls below a numerical threshold [6].

Accruals and deferrals for SaaS companies

SaaS companies often deal with both accruals and deferrals at the same time because subscription, usage, vendor, and billing schedules rarely move together.

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An annual subscription paid upfront can create deferred revenue for the SaaS provider. The same type of annual software contract purchased by the company's finance team can create a prepaid asset.

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Usage-based revenue billed after the customer consumes the service can create accrued or unbilled revenue at period-end. Cloud infrastructure, contractors, and other vendors that bill in arrears can create accrued expenses.

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Revenue adds another layer because billing status alone does not determine whether earned-but-unbilled revenue is a contract asset or receivable under ASC 606. A contract asset exists when the company's right to payment still depends on something other than time. Once only the passage of time remains, that right is a receivable.

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For a growing SaaS company, that can leave several schedules moving at once:

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The accounting becomes harder as contracts change, usage varies, entities multiply, and the number of recognition and amortization schedules grows. The important control is that each balance can be traced back to the transaction or contract that created it and forward to the schedule governing what happens next.

Manage accruals and deferrals with DualEntry

As transaction volume grows, finance teams have more accrual calculations, reversals, prepaid schedules, deferred revenue balances, supporting documents, and reconciliations to manage during each close.

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DualEntry's prepaid and accrual accounting software handles recurring journal entries, automatic accrual reversals, and straight-line prepaid amortization schedules. 

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Finance teams can attach source documents to journal entries and prepaid schedules, link a prepaid schedule to the bill it came from, and export the prepaid register as a roll-forward to reconcile against the general ledger.

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With DualEntry, teams can:

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• set up recurring journal entries that generate drafts for review or post automatically on their scheduled date;
• set a reversal date on an accrual so DualEntry creates the reversing entry automatically;
• create straight-line prepaid amortization schedules from a bill, an expense line, or a CSV import;
• attach supporting documents to entries and schedules;
• reconcile any GL account, including accrued liabilities, prepaids, and deferred revenue, as part of the wider close; and
• retain an immutable audit trail behind accounting changes.

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For revenue-side deferrals, DualEntry's revenue recognition software supports straight-line, daily pro-rata, usage-based, milestone, and immediate recognition. It generates the recognition schedule when a contract is activated and posts journal entries at each recognition cadence.

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That keeps accrual and deferral workflows connected to the general ledger while reducing the manual work required to maintain them throughout the close.

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Accrual vs Deferral FAQs