What are Accruals and Prepayments?

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WHAT ARE ACCRUALS AND PREPAYMENTS?
Let’s go back to the accounting concepts. More specifically the accruals and matching concept whereby it states that the expenses and income recorded in the accounts should relate to the time period of those accounts. Therefore, when the amount paid or received for an expense or income does not match the amount incurred, then an adjustment must be made. This adjustment is better known as an accrual or prepayment! The aim of an accrual or prepayment is to match the expenses used in that period to the revenues raised in the period. Accruals and prepayments play an important role to make sure that the financial records show a true and accurate reflection of an organisations activities. The main principle for treating accruals and prepayments in the profit and loss are that accruals you add and for prepayments you deduct. So, accruals add, prepayments deduct. And in the balance sheet an accrual is treated as a current liability and a prepayment is treated as a current asset.

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