Accruals / Matching

The accruals concept is to match revenues and expenses to the period to which they relate.

Application of this concept is the justification for the following examples.

Depreciation/Amortisation - matching the benefits coming from the use of an asset to the periods to which that benefit relates.

Calculating Cost Of Goods Sold - matching sales to the relevant stock movements.

Adjusting Deferred and Accrued Revenues -

1. Deferred revenue arises when cash is received from a customer in advance of the delivery of service or stock to which the cash receipt relates. An example might be if you are an insurer who has been paid by a customer upfront to provide insurance. In order to match revenues to the correct period it should not be included within the income statement. If it has been, then the following adjustment is required.

Dr Revenue (to decrease recorded income)
Cr Deferred Revenue (this is an increase in the deferred revenue account which is a liability account on the balance sheet)

2. Accrued revenues arises when work is done but remains unpaid and uninvoiced at the balance sheet date. An example might be a painter who has painted half a house. In order to match the revenue the following adjustment is required

Dr Accrued Revenue (this is an increase in the accrued revenue account which is an asset on the balance sheet)
Cr Revenue (increasing recorded income)

Note

In the examples above, the insurance customer who has prepaid possesses a prepaid asset and the painter's customer has an accrued asset.