In the summary of adjusting entries, what is the main difference between accrual adjustments and deferral adjustments?

• A. Accrual adjustments always decrease both assets and revenues, while deferral adjustments always increase both liabilities and expenses.
• B. Accrual adjustments record revenues earned or expenses incurred before cash is received or paid, while deferral adjustments allocate cash received or paid before revenues are earned or expenses are incurred.
• C. Accrual adjustments convert liabilities into expenses, while deferral adjustments convert expenses into liabilities.
• D. Accrual adjustments are only needed for cash-basis accounting, while deferral adjustments are only needed for accrual-basis accounting.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the purpose of adjusting entries in accounting, which is to ensure that revenues and expenses are recorded in the period they are earned or incurred, following the accrual basis of accounting.
2. Step 2: Define accrual adjustments as entries that recognize revenues earned or expenses incurred before any cash has been received or paid. This means recording revenue or expense first, then cash later.
3. Step 3: Define deferral adjustments as entries that allocate cash received or paid in advance to the appropriate accounting period when the revenue is earned or the expense is incurred. This means cash is recorded first, then revenue or expense later.
4. Step 4: Recognize that the main difference lies in timing: accrual adjustments deal with revenues and expenses before cash changes hands, while deferral adjustments deal with cash transactions that occur before the related revenues or expenses are recognized.
5. Step 5: Summarize that accrual adjustments ensure revenues and expenses are recorded in the correct period despite no cash flow yet, whereas deferral adjustments postpone recognition of revenues or expenses until the appropriate period after cash flow has occurred.