The financial records need to reflect what has happened in this financial year to provide a true image of the business . Hence, in accounting we have accruals and prepayments
What is an accrual?
An accrual is money that needed to be payed last year but was not payed. Therefore, in the current financial year, an accrual (amount owing is added) is shown in both the T account and in the statement of Financial Position.
There are 2 types of accruals
- Accrued income eg commission receivable (someone owes us commission)
- Accrued expense eg Wages owing (we owe
What is a prepayment?
A prepayment is money that has been payed in advance last year. Therefore, in the current financial year the prepayment amount is reduced. It is shown in both the T account and Statement of Financial Position.
There are 2 types of prepayments
- Prepaid income eg.
- Prepaid expense eg. rent paid in advance