Accruals vs deferrals.

In plain English

Accruals and deferrals are the period-end adjustments that put revenue and expenses in the right period when cash timing and economic timing disagree. An accrual comes first in economics and later in cash: wages earned before payday, revenue earned before the invoice goes out. A deferral is the reverse, cash first and recognition later, as with prepaid insurance or a subscription collected up front. Every accrual and deferral pairs an income statement account with a balance sheet account. Together they are the machinery that makes accrual accounting different from simply watching the bank balance.

01Why it matters

These four entries are why a month with terrible cash flow can be a strong month for the business, and knowing which is which stops you from reacting to the wrong signal.

02The math, step by step

Say a company earns 8,000 dollars of unbilled work (accrued revenue), owes 5,000 dollars of unpaid wages (accrued expense), collected 12,000 dollars for future service (deferred revenue), and prepaid 3,000 dollars of insurance (prepaid expense). Cash moved 9,000 dollars in, but earned profit that month is 3,000 dollars.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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