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∮ Accruals & Deferrals

 ~ Suppose I go to a bar and buy a drink? If I pay right there and then, then this would be an example of Cash Basis accounting. On the other hand, if I tell the bartender to put it on my tab, then I have Accrual Accounting. 

GEM> That's a great example!

Cash Basis Accounting: Paying for the beer immediately would be cash basis accounting. You're recognizing the expense (the cost of the beer) at the same time you're paying for it.

Accrual Basis Accounting: Telling the bartender to put it on your tab would be accrual basis accounting. You're incurring the expense (the cost of the beer) when you consume it, even though you won't pay for it until later. The bar would then record this as an account receivable on their balance sheet.

In essence, the difference lies in when the expense is recognized. With cash basis, it's when you pay. With accrual basis, it's when you consume the good or service.

~ And just to be sure. telling the bartender to put it on your tab is not an example of A deferral - it's an accrual.

GEM> That's correct.

Telling the bartender to put it on your tab is not an example of a deferral, but rather an accrual.

Accrual: You're recognizing the expense (the cost of the beer) when you consume it, even though you won't pay for it until later.

A deferral would occur if you were to pay for the beer upfront, but the bar hadn't yet provided the service (e.g., if you pre-paid for a round of drinks). In that case, the bar would defer the revenue until they've delivered the drinks.

More GEMS. I will just post the responses.

Yes, that's a good example of a deferral.

In this case, you're paying for the drinks upfront, but the bar hasn't yet provided the service (the drinks). The bar would therefore defer the revenue until the drinks are consumed at the party. Once the party is over and the drinks are consumed, the bar can recognize the revenue.

Yes, a catering service would also be a good example of a deferral.

If you pay a catering company upfront for a meal that will be delivered and served at a later date, the catering company would defer the revenue until the meal is delivered and consumed. This is because the service (the meal) hasn't been provided yet, even though you've paid for it.

One more GEM>

~ Okay, so suppose I ran out a bar to throw a party. If I pay ahead of time for all the drinks that will be consumed. That is a deferral. On the other hand if I tell the bartender that at the end of the party, let him calculate the bill and I will pay him everything then that's an accrual, correct.

GEM> 

That's correct.

  • Deferral: Paying for the drinks upfront is a deferral. The bar would recognize the revenue over time as the drinks are consumed.

  • Accrual: Agreeing to pay at the end of the party is an accrual. The bar would recognize the expense (the cost of the drinks) as they are consumed and record an account receivable.

Yet one more GEM for completeness sake>

That's a very good point.

Accruals and deferrals are indeed recognized from the perspective of the receiving entity (the bar, in your example). It's about when the revenue or expense is recognized on their books, not from the perspective of the paying entity (the customer).

Here's a breakdown:

Deferral: The bar receives the money (prepayment) before providing the service (drinks). They defer the revenue until the service is provided.

Accrual: The bar provides the service before receiving the money. They accrue the expense when the service is provided, even though payment hasn't been received yet.

Key takeaway: Accruals and deferrals are accounting techniques used by the receiving entity to align revenue and expenses with the underlying economic activity, regardless of when the cash flows occur.

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