Distinguish between accruals and deferrals with examples.

• A. Accruals recognize revenues or expenses before cash is exchanged; deferrals delay recognizing revenues or expenses until later
• B. Accruals delay recognizing revenues; deferrals recognize revenues before cash is exchanged
• C. Accruals are only expenses; deferrals are only revenues
• D. Accruals and deferrals are the same

Answer: (A)

In accrual accounting, revenues and expenses are recognized when the economic activity occurs, not when cash changes hands. Accruals bring revenues or expenses into the books before cash is exchanged—for example, services performed but not yet billed (accrued revenue) or expenses incurred but not yet paid (accrued expenses). Deferrals, on the other hand, postpone recognition until a later period after cash has already been exchanged—for instance cash received in advance for future services (unearned revenue) or cash paid for a future benefit (prepaid expense) that is recognized progressively over time. The essential idea is that accruals align with when the earning or incurring happens, while deferrals align with when the benefit or obligation actually occurs in the future.