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)
|
