expense must be recognized in the accounting periods to
which they relate rather than on cash basis. 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.
Under Accruals basis of accounting, income must be recorded
in the accounting period in which it is earned. 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. 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.
Expenses, on the other hand, must be recorded in the
accounting period in which they are incurred. 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 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.
Accruals basis of accounting ensures that expenses are
"matched" with the revenue earned in an accounting period. Accruals
concept is therefore very like the matching principle.
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