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Accounting for accruals and prepayments

Accrued and prepaid expenses

1.1 Accrued expenditure

An accrual arises where expenses of the business for the current period have been
incurred but not yet paid at the end of the year. This can be the case with telephone
bills where you incur the expense and then wait for the bill to arrive to tell you the
exact charge.

In this case, it is necessary to record the extra expense relevant to the year and
create a corresponding statement of financial position liability (called an accrual) as
follows:

Debit Expense account (SOPL)

Credit Accrual account (SOFP)

An accrual therefore reduces profit.

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