5 questions foundRevenue and expenses are recognised when earned or incurred, not when cash is received or paid, so income matches the costs of the same period.Electricity used in Dec but billed in Jan -> expense recognised in DecReal-world example Ensures December's profit includes December's costs, not next month's.How do you record an accrued expense?
Intermediate Recognise the expense now and a liability (accrual) for the amount owed but not yet invoiced.Dr Electricity Expense 300
Cr Accruals (liability) 300Real-world example Booking unbilled utilities at month-end so the P&L is complete.How do you record a prepayment?
Intermediate Remove the portion not yet used from the expense and carry it as a current asset (prepaid expense).Paid insurance 1,200 for a year, 3 months used:
Dr Prepaid Expense 900 Cr Insurance Expense 900Real-world example Spreading an annual insurance payment across the months it covers.What is accrued income?
Intermediate Income earned in the period but not yet invoiced or received; recognised as revenue and a receivable.Dr Accrued Income (asset) 500
Cr Revenue 500Real-world example Interest earned but not yet credited by the bank at year-end.They adjust the income statement to the correct period's profit and create current liabilities (accruals) or current assets (prepayments) on the balance sheet.Accrual -> expense up, liability up; Prepayment -> expense down, asset upReal-world example Correct period cut-off is a key audit focus and affects reported profit.