Financial Accounting › Accruals & Prepayments
How do accruals and prepayments affect the financial statements?
AdvancedAnswer
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.