Accruals concept is therefore very similar to the matching principle. Conversely, prepaid expense must be not be shown as expense in the accounting period in which it is paid but instead it must be presented as such in the subsequent accounting periods in which the services in respect of the prepaid expense have been performed.Īccruals basis of accounting ensures that expenses are “matched” with the revenue earned in an accounting period. Therefore, accrued expense must be recognized in the accounting period in which it occurs rather than in the following period in which it will be paid. Conversely, prepaid income must be not be shown as income in the accounting period in which it is received but instead it must be presented as such in the subsequent accounting periods in which the services or obligations in respect of the prepaid income have been performed.Įxpenses, on the other hand, must be recorded in the accounting period in which they are incurred. Therefore, accrued income must be recognized in the accounting period in which it arises rather than in the subsequent period in which it will be received.

Under Accruals basis of accounting, income must be recorded in the accounting period in which it is earned. An exception to this general rule is the cash flow statement whose main purpose is to present the cash flow effects of transaction during an accounting period.

Of course, if your business makes under 5 million a year or youre an individual freelancer with a handful of small yearly projects, cash-basis could work for you. A business that uses the accrual basis of accounting recognizes revenue and expenses in the accounting period in which they are earned or incurred. Financial statements are prepared under the Accruals Concept of accounting which requires that income and expense must be recognized in the accounting periods to which they relate rather than on cash basis. Accrual-basis accounting is a secure, accurate way to log business transactions and keep tabs on income and expenses.

Accrual accounting principles