Accruals & Prepayments

Accrual:
Accruals concept states that income and expenses must be recorded in the accounting records and reported in the financial statements of the period to which they relate.

Accruals are accrued expenses, they have not yet been paid for. Accruals are current liabilities.

Prepayment:
The payment of a debt in full before it is due. OR Payments which have been made in one accounting period, but should not be charged against profit until a later period because they relate to that later period.

If we pay for something that relates to next accounting period, we use a prepayment to transfer that charge forward to the next period. Prepayments are current assets.

KEY TERMS:

Accrued expenses:Expenses that has been incurred but not yet paid.

Accrued income:Income that is earned but not yet received.

Prepaid expense:Expenses that has not been incurred but has been paid in advance.

Pre-received income:Income that is not earned but received in advance.