Final answer:
Deferrals and accruals are based on the accrual accounting principle, which records financial transactions when they occur rather than when cash is exchanged. Deferrals postpone revenue and expense recognition, while accruals involve recognizing transactions that have occurred but are not yet settled in cash.
Step-by-step explanation:
Deferrals and accruals are based on the accrual accounting principle, which is one of the fundamental accounting principles. According to the accrual principle, financial transactions are recorded in the periods in which the events occur, rather than when the actual cash is received or paid.
This concept ensures that the financial statements provide a more accurate picture of a company's financial position and performance.
Deferrals are a part of accrual accounting that deal with the postponement of the recognition of certain revenues and expenses until they are actually earned or incurred. An example of a deferral is when a company receives payment in advance for services to be provided in the future; the revenue is deferred until the service is performed.
Accruals, on the other hand, involve recording expenses and revenues that have been incurred but not yet paid or received. An example of an accrual is recognizing interest expense for a loan before the interest payment is actually made.