Which statement about accrual and deferral adjustments is correct?

• A. Accrual adjustments recognize revenue or expense before cash is received or paid; deferral adjustments recognize revenue or expense after cash has been received or paid.
• B. Accrual adjustments postpone revenues; deferral adjustments accelerate revenues.
• C. Accrual adjustments only apply to taxes; deferral adjustments apply to financing.
• D. Accrual and deferral adjustments are optional.

Answer: (A)

Accrual and deferral adjustments are about timing when revenue and expenses are recognized so the financial statements reflect what actually happened in the period. Accrual adjustments record revenue earned or expenses incurred before cash changes hands, ensuring those amounts appear in the period they belong. For example, services performed but not yet billed are revenue earned now, so you record a receivable and revenue. Similarly, wages earned by employees but not yet paid are expenses now, so you record a liability and expense.

Deferral adjustments handle situations where cash has moved but the related revenue or expense belongs in a future period. If you’ve received cash in advance for a service, you record a liability (unearned revenue) and later recognize the revenue as the service is delivered. If you prepaid for a cost (like insurance or rent), you record it as an asset and gradually expense it over time as the benefit is used.

This explanation aligns with accrual accounting principles, whereas statements about applying only to taxes or financing, or claiming adjustments are optional, are not correct.