Wednesday, May 25, 2022

Accounting in 10 Minutes or Less – Deferral vs. Accrual

Aright! So, now we're going to talkabout the difference between the accrual and the deferral entry as it relates toan adjusting entry. Okay so what I want you to do is just go ahead and startgetting it in your mind that when we talk about a deferral, we're talkingabout a situation where cash is BEFORE. Cash comes before, alright? And then forthe accrual basis cash comes AFTER, alright? So, what are some examples? So, whenwe're thinking about the deferral basis, some examples that we're usually gonnasee, this is just typically, we're gonna have our prepaid accounts. Remember aprepaid account – prepaid rent, prepaid insurance – is an account where we saidokay, it's the beginning of the year we .

Know our rent is going to be a hundreddollars a month. We're going to go ahead and prepay that. We're going to pay $1,200 inJanuary for the rent for the rest of the year. So, that's going to be one of ourprepaid accounts. Remember, that's cash BEFORE, cash BEFORE we earned it, cashBEFORE we have umm, the expense has been incurred. So, we're prepaying somethingfrom an expenses standpoint. So, I'll just put an “EXP” right there. And then also wehave the unearned revenues, alright? Remember, on our revenue, it's kind oflike a deposit or anything where the client has come in giving you money, cashbefore you have done any work, alright? So, we have not earned this money so wehave to put it, house it in this account .

Called unearned revenue. Remember, just as a reminder, unearned revenue is a liability and prepaid expense is an asset, alright?So, generally most expenses are going to be “expenses” mostrevenues are going to be for “revenues.” However, these are two exceptions. Theprepaid expense is always an asset and unearned revenue is always a liability.Alright, so slipping over to the accrual basis. The accrual basis is whencash is going to come AFTER. This is generally kind of what we're used toseeing a lot of times in accounting because what happens is we do the workand we're like, hey we're going to recognize our revenue. We've earnedthis money, so we want to recognize it. .

That is what we call an accrual. On theother side we say we get to the end of the month. Our utility bill is due, butmaybe we don't want to pay it yet. Or it's just not time for our payrolldepartment to process the check. Not payroll, accounts payable. Our accounts payable department has not processed the check just yet. So, instead of them actually going ahead and paying cash, we book it as a payable. And therefore it'san accrual because cash is going to be paid AFTER the transaction date, after thetime that it is actually due. So, over here under the accrual method, the thing thatwe try to keep in mind is these are .

Going to be where our receivables, you know,I always mess that up, “I before C, I before E except after C.” I do that every time!Alright, so our receivables are going to be here. When we're talking about revenue, alright?And then also we're going to have our payable when it comes toexpenses, alright? So, that's pretty much the short and sweet of it. If you canjust remember that deferral are gonna be situations where cash is going to comeBEFORE and then the accrual is when cash is going to come AFTER, then I thinkyou'll be okay, alright? As always please leave comments, share, like,whatever, and just you know feedback is always helpful!Thanks! .

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