There are two main types of revenue recognition: accrual and deferrable. Each method has its benefits, depending on your situation.
Knowing the differences between the two and when to use each type of revenue recognition can help you determine the best scenario for your business.
Most of us are taught that accrual is the best practice. But is that really the case? Learn the difference between accrual and deferral revenue and decide whether they are perfect for your business.
The difference between these two types of revenue is quite challenging. If you’ve ever wondered what the difference between accrual and deferral revenue is, this article is here to help.
The term accrual means that revenue is recognized when the revenue is earned. Contrast that with deferral, which means a company may recognize revenue whenever the revenue is earned.
Understanding the difference between accrual and deferral is key in clarifying which method you’ll use for revenue recognition in your business or project planning.
In other words, accrual revenue is when you get paid immediately while deferral revenue is when you get paid at a later date.
The accrual method of accounting is preferred by companies because it provides a more accurate and detailed picture of business income. The income is recorded at the time when the product was purchased or services were rendered, but not until the goods are sold or services are used.
This results in much higher depreciation charges than the difference between cash revenue and cash expense.
A deferral is a delay in the payment of an invoice while a credit balance is available. When you pay an invoice slowly, it means that money is deducted first from your customer receivable account and then goes to the invoicing receivable account.
However, there is no immediate debit of the accounts from which all the receivables are drafted. The deferred invoices are at a credit balance so that no money comes out of the accounts from which they are drafted.
This is an important marketing concept in the software industry. Deferral revenue is the idea that your software purchase will not occur immediately. Instead, you have to make provisions in your budget so that you can finance your software once it is paid for.
This allows you to save money in the short term, but also allows you the freedom to make decisions based on a product’s lifespan and effectiveness rather than solely on immediate return.
As was previously mentioned, deferral is a method used in accounting to record revenue that would otherwise be deferred until a later date. In the same way, the accounting cycle is an effective way to collect relevant data about an organization’s performance.
Accrual is making a payment that’s due immediately. Deferring and accruing are similar, yet they’re important concepts when it comes to managing your bank account.
Similar to deferred maintenance, in finance deferral is part of a financial strategy to reduce costs and potentially increase profits.
Instead of writing down assets such as equipment and buildings, you place them on a deferred accounting schedule and ignore them as long as possible.
The idea is that deferred accounts create no deficit: the value of the assets is already booked, but the costs cannot be.
Deferral is an accounting term that refers to one side of a transaction being recorded before the other. The accrual is the opposite – the first side of a transaction is recorded before the second.
By contrast, deferred revenue is something that must be paid for before it’s actually earned. Accrue revenue is recorded immediately after it’s earned.