Prepaid And Accrued Expenses

1. In basic cash accounting, profit for an accounting period is calculated, by looking at the difference between the revenue received in cash and the cash paid in cash.
2. Business Service or professional (legal, clinic), and small business such as hawkers and slaves are practicing basic cash accounting, that is, all or most of the transactions are cash-based.

Accrual Basic Accounting

1. Accrual basis accounting involves the matching of revenue for a period of accounting with the expenses incurred to obtain revenue within the accounting period.
2. The expenditure for a year may not be the same as the payment of the money during the year. Similarly, the results may not be the same as the money received in any given year.
3. At balance sheet date, all revenue and expenditure accounts must be adjusted and the amount that should be received or paid is transferred to the Trading Account or Profit and Loss Account for that year to calculate the profit of the period. Adjustments must be made for: (a)Unpaid expense / accrued expense
(b)prepaid expenses / postpaid expenses
(c)unacceptable results / accrued revenue results received / postpaid results

Accrued Expenses

  1. Accrued Expenses are expenses that have been incurred during the accounting period but are not paid within the accounting period.
  2. Accrued Spending must be added to the expense paid so that the actual amount of expenditure is transferred to the Profit and Loss Account (next to debit side).
  3. This is in line with the concept of accounting in accounting, which is an expense in an accounting period, regardless of already paid or not, must be matched with the outcome of the accounting period. In this way, a more profitable net profit is obtained.