ACCRUALS AND PREPAYMENTS

The key to these is the need to match income and expense in the correct accounting period.

 

An accrual is the provision for income or expense that relate to the accounting period for which no invoice

has been issued yet.

 

A prepayment is the adjustment for income or expense that have been received or has been invoice in advance

for the goods or services being provided respectively.

 

Prepayments and accruals can be very confusing and complicated if not clearly understood right from the beginning.

This is because adjustments may be required for both income and expense for prepayment. In contrast, some  may call for a provisions for both income and expense items; accruals.

 

Prepayments and accruals are actually accounting entries necessary to ensure that there is matching between income

and expense in the correct accounting period.

 

Accruals refer to the provision for income or expense that relate to an accounting year for which no invoice has been raised yet.

 

Prepayments refer to the adjustments for income or expense which has been received or has been billed in advance.

 

The key points here as mentioned earlier, are

-          Matching of revenue and expense in the correct accounting period

-          Provision must be made for the accrued expense and accrued income

-          Adjustments must be made for prepaid expense and prepaid income.

 

IMPORTANT REMINDER

THIS IS TO PROVIDE STUDENTS A COURTESY REMINDER THAT THIS BLOG IS CATERED

TO HELP ACCOUNTANCY STUDENTS AT BASIC LEVEL TO GAIN A QUICK SUMMARY OF

MAJORLY ALL THE BASIC COMPONENTS OF THE BOOK-KEEPING AND ACCOUNTING STUDIES.

 

IT IS NOT MEANT TO PROVIDE A COMPLETE CONTENT OF THE SUBJECT MATTER.

 

THEREFORE, STUDENTS ARE ADVISED TO TAKE THIS INFORMATION RESOURCE AS A SUPPLEMENTARY READING ONLY.

 

THIS READING MATERIAL IS ONLY A SUMMARY OF WHAT IS ESSENTIAL IN GETTING  A GOOD

UNDERSTANDING BUT NOT AN EXHAUSTIVE ONE OF THE RELATED TOPIC.

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