What is the concept of accruals in bookkeeping?
What are accruals or what is the concept of accruals in bookkeeping? And how do they relate to prepayments? I have read a basic explanation but does anyone know a more thorough one please?
- Wayne ZLv 71 year agoFavorite Answer
In a nutshell, it is matching revenues and expenses to the time period for which they are for and not for when they are actually paid/received.
You receive December's phone bill on 12/26/X1 but it is not due until 1/15/X2.
DR Phone Expense
CR Accrued Expenses Payable
DR Accrued Expenses Payable
Even the though the bill is paid in January X2, it is recorded as an expense in December X1
- olliverLv 61 year ago
The use of accruals and prepayments in accounting ensures that revenue and expenditure is allocated to the correct accounting period. Adjusting the accounting records for accruals and prepayments ensures that financial statements are prepared on an accruals and not cash basis and comply with the matching concept of accounting.
- Don GLv 71 year ago
Bookkeeping is either based on the Cash or Accrual method. Your check book is an example of bookkeeping on the cash basis. You only record the transaction when it is paid (Expense) or when it is received (Income).
Accrual basis accounting recognizes all transactions in the period in which they are earned (Income) or in the period in which they apply (Expense), regardless of when they are received or paid.
Prepayments occur when an expense is paid before the period to which it applies. Insurance premiums are usually paid in advance. So if a 12 month premium is paid on Jan 1, you only want one month's premium included in January's Income & Expense Statement. The balance is Prepaid and amortized over the remaining 11 months.