Business studies
Accruals and deferrals calculator with journal entries
Enter the amount, the period it covers and the closing date: the calculator tells whether it is an accrual or a deferral, of income or of an expense, works out the share for the year and writes the double-entry bookings.
Accruals and deferrals: which one and why
The matching principle asks that income and expenses be reported in the period they relate to, not the one in which cash changes hands. When a transaction straddles the year end, such as a year's rent from November to October or six months of interest from September to February, part of it belongs to this year and part to the next. Accruals and deferrals are the adjusting entries that make that split.
Two questions decide which one applies. Is it an expense or income? And has the cash already moved, or will it move later? If it was paid or received in advance, part of what was booked belongs to next year and is deferred: a prepaid expense if it is an expense, deferred income if it is income. If it will only be paid or received at the end, part of it has already been earned or incurred this year without being booked: an accrued expense or accrued income.
Example: rent of 12,000 paid on 1 November for one year. At 31 December two months out of twelve have passed, so 2,000 is this year's expense and 10,000 next year's. The entry is debit Prepaid expenses, credit Rent expense, 10,000, reversed on 1 January. Counted in actual days it is 61 days out of 365 and a prepayment of 9,994.52: only the way of counting time differs.
Common mistakes
- Mixing up asset and liability: a prepaid expense is an asset, a right to a service still to come, not a debt. Asking whether the business holds a right or owes an obligation at the year end settles it.
- Computing the adjustment on the wrong part: an accrual is this year's share, a deferral the later years' share. Swapping them gives the complementary amount.
- Leaving out the first or the last day: the period from 1 November to 31 December has 61 days, both ends included.
Frequently asked questions
What is the difference between an accrual and a deferral?
A deferral pushes into the future part of an amount already booked, because it was paid or received in advance. An accrual brings into this year part of an amount that will only be booked when it falls due, because it is paid or received in arrears.
Actual days or 30/360?
Textbooks and whole-month periods often use the 30/360 year, which gives round figures; accounting practice more often counts actual days. The calculator does both, and the difference is usually small.
Why is a deferral reversed at the start of the next year?
Because on the first day of the new year the deferred part becomes that year's expense or income. The reversal moves it into the income statement of the year it belongs to and clears the balance-sheet account.
How is an accrual cleared?
When the full amount is paid or received: part of it clears the accrual account, and the rest is expense or income of the new year. No separate reversal is needed.
How this calculation works
Share for this year = amount × time from the start of the period to the closing date ÷ length of the period. Share for later years = amount − share for this year. An accrual is this year's share, a deferral the later share. Time is counted in actual days, both ends included, or in 30/360 days: 360 × (difference in years) + 30 × (difference in months) + (difference in days, with the 31st counted as the 30th).