Accruals

In this session, we explore accruals, a cornerstone of modern accounting that ensures financial statements accurately reflect a business's performance and position. Accrual accounting centered on the matching concept dictates that transactions are recognized in the periods to which they relate, regardless of when cash is received or paid. This approach aligns revenues with related expenses, providing a truer picture of profit and financial performance and enabling meaningful comparisons across periods and between businesses. Accruals address the reality that cash flows do not always align with the periods in which economic activities occur. Two examples are prepayments and accruals. A prepayment occurs when a business pays cash in advance of receiving the benefit. For instance, paying for a four month license means only one quarter of the expenses used in that month. The rest is a prepayment asset. Conversely, an accrual is when an expense is incurred but not paid, such as utility bills received after year end. Accruals ensure financial statements include all relevant expenses and income for a period, not just cash movements. Recording accruals and prepayments involves making adjusting entries at period end. For prepayments, after initially recognizing the cash payment as an asset, the expense is subsequently recognized over time as the benefit is consumed. For accruals, expenses that have been incurred but not yet paid are recorded in the current period, and a liability is recognized. These adjustments ensure revenues and