What are Prepayments and Accruals?

Prepayments and accruals adjust financial accounts at the balance day for amounts that cross-over the end of the financial period.

An example is an expense that the business will get benefit from in the next financial period. This could be an insurance premium that is going to provide insurance coverage into the the future. The adjustment works out the benefit for the next period and adjusts this out of the current accounts. This type of adjustment is called a prepayment and is shown as an asset.

Another common adjustment is to determine if any wages and salaries will be owing at the end of the financial year. The wages owing to employees at the balance date are called an accrued expense and will be shown as a liability.

With these adjusting entries, financial reports are prepared with more accuracy.

To learn more about the complicated topic of prepayments and accruals take this Prepayments and Accruals Tutorial Course Closing Entries Tutorial Course

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