Section 4 of 7
Income and expenditure must be matched to the accounting period in which they are earned or incurred, regardless of when cash is received or paid.
Also called the matching concept: match the income to the costs that generated it.
| Adjustment | What it means | SFP treatment | IS effect |
|---|---|---|---|
| Accrued expense | Expense incurred but not yet paid | Current liability (accruals) | Add to the expense in the IS — increases expense, reduces profit |
| Prepaid expense | Expense paid in advance for the next period | Current asset (prepayments) | Deduct from the expense in the IS — decreases expense, increases profit |
| Accrued income | Income earned but not yet received | Current asset (accrued income) | Add to income in the IS — increases income, increases profit |
| Prepaid income | Income received in advance for the next period | Current liability (deferred income) | Deduct from income in the IS — decreases income, reduces profit |
| Adjustment | DR | CR |
|---|---|---|
| Accrued expense | Expense account | Accruals (liability) |
| Prepaid expense | Prepayments (asset) | Expense account |
| Accrued income | Accrued income (asset) | Income account |
| Prepaid income | Income account | Deferred income (liability) |
Brenfield Ltd's year end is 31 December 2024.
Insurance: The cash book shows £3,600 paid. This covers 1 January 2024 – 28 February 2025 (14 months).
Rent receivable: £6,000 received for January–September 2024. October–December not yet received.
The standard layout for an accruals/prepayments adjustment:
Insurance Account
Dr Cr
Date Detail £ Date Detail £
1 Jan Balance b/d 3,600 31 Dec Prepayment c/d 514
31 Dec Income statement 3,086
3,600 3,600
1 Jan Prepayment b/d 514
Finished this chapter? Mark it complete to earn XP.