Accruals and Prepayments

According to matching concept, expenses should be matched to revenue generating period and should be reflected in the statement of accounts.

Accruals are income or expenditure for the reporting period which is not received or paid for goods or services provided in the accounting period. Therefore, as per matching concept though the revenue or expenses is not received or paid statement of accounts should reflect the gross position as is they are received or paid. For this accrual account is created.

Prepayments are advance receive of income or payment of expenditure for which goods or service will be delivered/received after the reporting period. Therefore, as per matching concept though receive/payment is done in advance statements should not reflect the gross position beforehand. For this prepayment account is created.

According to the accruals/prepayment concept, expenses should be recognised when incurred rather than when paid and income should be recognised when earned, not received.

Accrued expense arises where goods/services have been received/consumed, relating to the period, have not been paid by the period end. In this situation, according to matching/accruals concept expenses used in generating revenue should be recognised because expense has incurred in the period. 

The related entry is:

Dr. Expense account       XX

Cr. Accrual           XX

Accrued income arises where goods/services have been delivered/provided, relating to the period, have not been received by the period end. In this situation, according to matching/accruals concept income earned in the period should be recognised.

The related entry is:

Dr. Accrual          XX

Cr. Income account         XX

Prepaid expense arise where no goods/service have been received/consumed, relating to the period, and partial/full amount for goods/service to be received in following period have been paid in advance. In this situation, according to matching/prepayment concept expenses paid should not be recognised.

The related entry is:

Dr. Prepayment                XX

Cr. Expense account       XX

Prepaid income arise where no goods/service have been delivered/provided, relating to the period, and partial/full amount for goods/service to be received in following period have been received in advance. In this situation, according to matching/prepayment concept income received should not be recognised.

The related entry is:

Dr. Income account         XX

Cr. Prepayment                                XX

Expenditure	Accrued	Profit reduced (goods/service received)
		Current liability (payment not made)
	Prepaid	Profit increase (goods/service not received)
		Current asset (payment already made)
Income	Accrued	Profit increase (goods/service delivered)
		Current asset (payment not received)
	Prepaid	Profit decrease (goods/service not delivered)
		Current liability (payment already made)

CIMA Article: C02 financial accountingfundamentals – period end adjustments: accruals and prepayments