What are Deferrals And Accruals
Deferrals means those Expenses which are paid by business but the benefit against these still not received during the Current Accounting Period or an Income which is received by the business but still it is not earned due to non delivering of goods or
non rendering of services. Examples of Deferred Expenses are Prepaid Expenses or Prepayments e.g., Prepaid Rent Or Prepayment Rent. Deferred Income include Unearned Revenue.
Deferred Expenses are categorized as Current Assets on Balance Sheet as these have life within one year. These are also known as Advance Payments, Deferred Expenses, Expenses Paid In Advance, etc.
Deferred Expenses Adjusting Journal Entry:
There are two possibilities for Deferred Expenses relating to passing Adjusting Entries:
1. When Prepaid Expenses initially recorded as an Expense
2. When Prepaid Expenses initially recorded as an Asset
For the 1st case:-
When the expense is incurred, i.e., Rent paid Rs. 12000 Per Month on 3rd November, 2017 For 12 Months, then following Accounting Journal Entry is passed in the Book or Journal of the company:
Prepaid Expenses a/c 144000
Cash a/c 144000
(Expenses Paid In Advance)
At the end of Current Accounting Period, the portion of the expense which is related to the next Accounting Period is transferred to Prepaid Expense by passing following Adjusting Entry:
Prepaid Expense a/c 72000
Expense a/c 72000
(Portion of Expense is transferred to Prepaid Expense Account)
Here Total Rent for 12 Months = Rs. 144000 (12000 X 12)
For 2017, Rent is 6 X 12000 = Rs. 72000
For 2nd Case:-
The whole Expense is treated as Prepaid Expense and following Adjusting Entry is passed:
Prepaid Rent a/c 144000
Cash a/c 144000
(Expenses Paid In Advance)
At the end of Current Accounting Period i.e., 31st December, 2017, the portion of Prepaid Expense for which we received the benefits is transferred to Rent Expense Account or in other words we close that part of amount of Prepaid Expense for which the company
had already received the benefit as shown below:
Rent a/c 72000
Prepaid Rent a/c 72000
(The Benefits Against Rent Expense Now Received Rs. 72000)
Deferred Incomes are listed as Current Liabilities on Balance Sheet because these have limited life usually less than one year. Other name for Deferred Income is Income Received in Advance.
Deferred Incomes Adjusting Journal Entry:-
For Deferred Incomes, there are also two cases:
.1 When Deferred Income initially recorded as Income
2. When Deferred Income initially recorded as Unearned Revenue
1. For 1st Case:-
When whole amount income received in advance is treated as Income. For Example, Commission received For Rs. 10000 from client in advance but at the end of Accounting Period Rs. 5000
is still unearned against which services is still to be delivered to the client by the Commission’s Agent. In such case, following adjusting entry is passed in the book of company:
Cash a/c 100000
Commission a/c 10000
(Commission Received In Advance)
At the end of Accounting Period, the portion of commission against which services are still to be delivered to client is transferred to Unearned Commission Account as shown below:
Commission a/c 5000
Unearned Commission a/c 5000
(Commission Received In Advance Now Earned)
For 2nd Case:-
When the amount of Commission Rs. 10000 is received as advance, then whole amount is transferred to Unearned Commission Account as shown below:
Cash a/c 10000
Unearned Commission a/c 100000
(Amount of Commission Rs. 10000 Received In Advance)
At the end of Accounting Period, the portion of Commission which is not earned is transferred to Unearned Commission Account as shown below:
Commission a/c 5000
Unearned Commission a/c 5000
(Portion of Commission’ Amount is Transferred to Unearned Commission Account)
What Are Accruals?
Accruals means those expenses against which the benefit is received by the company but the payment is not paid or services is not rendered to the customer or an income which is earned
by the business but the payment still is not received from customers by the company during the Current Accounting Period. Examples of Accrued Expenses are Outstanding Expenses, i.e., Outstanding Salaries,
Fees Payable, etc.
Accrued Expenses are categories as Current Liabilities on Balance Sheet. These are also known as Outstanding Expenses, Expenses Payable, etc.
Accrued Income is considered as Current Asset on Balance Sheet.
Accrued Expenses Adjusting Entry:-
If the company does not make payment of Salaries Rs. 300000 to employees for the Month of December, 2017 although the employees performed their services during
the Current Accounting Period, then following Adjusting Entry is passed in the Book of Business at the end of Current Accounting Period:
Salaries a/c 300000
Outstanding Salaries a/c 300000
(Salaries Rs. 300000 Payable By The Business To Employees)
Accrued Income Adjusting Entry:-
Suppose, we makes investment in a project on which we received an income (Return on Investment) of Rs. 30000 for 6 Months at the end of Current Accounting Period but the revenue for
remaining 6 Months Rs. 80000 is still in due, so, we pass the following Adjusting Entry in the Journal of Business as shown below:
Accrued Investment a/c 80000
Return on Investment a/c 80000
(Return on Investment Earned But not Received at the End of Current Accounting Period)
So, in Accrual Basis of Accounting, both Deferrals And Accruals play an important role in Matching Revenues With Expenses in appropriate accounting period and provide reliable information to Users of Financial Statements.
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