‘Accounting is accrual profession.’
|Goods or services which have been invoiced and paid, but not yet received.||Goods or services which have been received, but not yet invoiced or paid.|
Prepayments and accruals are both examples of the ‘matching’ concept (somewhat confusingly also known as the ‘accruals’ concept) (see Chapter 2 Cash versus accruals accounting). The objective is to match expenses to the period in which they are incurred, as opposed to paid.
One of the key things to be aware of is the dual impact of accruals on a business’s financial statements.
It’s useful to explore prepayments (or prepaid expenses) and accruals (or accrued expenses) at the ...