The net profit for a period should be calculated by charging the expenses which are relate to that period, if we preparing financial statements of a business for a period of eight months it would be appropriate to charge eight months expenses and income.
Accruals or accrued expenses are expenses which are charged against the profit for a particular period, even though they have not yet been paid for,
For example assume one of the company paid 240$ telephone bill for the year 2008/2009 but they have to pay 20$ more for that period, in the financial statements
- We charged to income and expenses account 260$.
- We show 20$ as accrued expenses in the balance sheet under the topic of current liabilities.
Prepayments are payments which have been made in one accounting period, but should not be charged against profit until a later period because they relate to that later period.
For example assume one of the company paid 240$ but they have to pay 250$ for the year 2008/2009 then we can see they paid 10$ prepayments for the accounting period, in the financial statements
- We charged to income and expenses account 240$.
- We show 10$ as prepayments in the balance sheet under the topic of current assets.