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Accrual and Prepayment

[Summary]What is an accrual or a prepayment? Your accounts will be prepared under what is known as the "accruals basis" – unless you are self-employed and choosing to do cash accounting. Accruals basis sounds a bit technical but it isn't that bad really.

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What is an accrual or a prepayment?

Your accounts will be prepared under what is known as the “accruals basis” – unless you are self-employed and choosing to do cash accounting. Accruals basis sounds a bit technical but it isn’t that bad really. I think about it in terms of “belonging”. You can only include sales and expenses that “belong” in or relate to the current financial year. Your accounts are not based on the money that was actually paid or received in the year, they are based on what should have been paid or received i.e. what belongs there.

Accruals and Prepayments Defined | Examples | Journal Entries

Accruals are expenses incurred but not yet paid while prepayments are payments for expenses for that are not yet incurred. Accruals and prepayments give rise to current liabilities and current assets respectively in accordance with the matching principle and accrual accounting.

Matching principle requires accountants to record revenues and expenses in the period in which they are incurred regardless of when the relevant payments are made. In order to create this 1-on-1 correspondence between revenue and expenses, expenses are recorded if they are incurred in a particular period even if they are not yet paid, because they were necessary to earn the revenue for that period. On the other hand, prepayments are recorded to represent payments related to goods and services that are to be consumed in future periods. It is this matching principle that differentiates accrual accounting from cash-basis accounting, which records revenues and expenses when they are received and not when they are earned or incurred.

Chapter 7: Accrual and Prepayment Part 1

Accrual and Prepayment

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Defining Accruals and Prepayments

Defining Accruals and Prepayments

Defining Accruals and Prepayments

Related Book

Bookkeeping and Accounting All-in-One For Dummies - UK, UK Edition

By Jane E. Kelly

Most people shudder at the thought of trying to define accruals and prepayments, let alone know how to process them. In reality, accruals and prepayments are relatively simple concepts that form part of the adjustments that you make at a period end (whether that be the month end or year end).

Accrual Accounting

Accrual and Prepayment

Accrual accounting is an accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur.

Accruals and Prepayments Explanation

At the end of an accounting period, payments owing by us and owing to us are often outstanding. As far as debtors and creditors are concerned, this is normal. Expenses and additional revenues are different in that they concern the profit and loss account and balance sheet, rather than just the balance sheet. This is where accruals and prepayments come in. Accruals and prepayments allow expenses and sales to be recognised in the period they are incurred or earned, rather than when cash changes hand, and includes them in financial statements in the related accounting period.

Prepaid Expense | Accounting Entries & Examples

Prepaid Expense

Prepaid expense is expense paid in advance but which has not yet been incurred.

Expense must be recorded in the accounting period in which it is incurred. Therefore, prepaid expense must be not be shown as expense in the accounting period in which it is paid but instead it must be presented as such in the subsequent accounting periods in which the services in respect of the prepaid expense have been performed.

adjustments for prepayments and accruals

General accounting

V. 23. Adjustments for prepayments and accruals

introduction

if shop expenses contain charges which really belong to next year

one of the objectives of accounting:
compute precisely the charges corresponding to the sales

adjustment for prepayment

changes in the Trial balance and the Income Statement

Accruals

Accrual and Prepayment

Accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense.

In Easy Steps Sage 50 Accounts: Setting up Prepayments and Accruals

Using Sage 50 Accounts 2016

Setting up Prepayments

To adjust statements and reports for any payments which have to be made in advance, for example rent or insurance, there is a Prepayments option available from the Nominal codes window. This allows for a payment to be shown as spread over the number of months it refers to, not just the month it was paid in.

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