Question

(a) What does accounting for accruals and deferrals essentially involve?

(b) After studying chapter 3, at what point in the accounting cycle would you conclude that most accrual and deferral work is done? Explain.

(c) Why is it important to account for accruals and deferrals "properly"?

Answer 1

Before answer this question we have to understand meaning of accrual and deferral

Accrued revenue Revenue is recognized in current year but still cash is not received.

Accrued expense Expense is recognized in current year but cash is not paid till the end of year.

Deferred revenue Cash is received for revenue which is not earned in this year.(Unearned revenue)

Deferrred Expense Cash is paid for expense that is not related to this year.(Prepaid expense)

A) Accounting of accrual and deferral

Accrual and deferral affect income statement (income/expense)and statement of financial position (asset or liability)

To account for accrual and deferral adjustment entries are passed.

Income or Expense is recognized in year in which it is earned or incurred.

B) At the end of accounting period , adjustment entries are made after that financial statements are prepared.

C)Accrual and deferrals are accounted to present true and fair view of financial statements.They are accounted to follow matching and revenue recognition principle.