Introduction
Any transaction that has an effect on the balances of a company's financial statements is considered an accounting case. Accounting events had an effect on the following statements: the statement of financial status, the statement of sales, the statement of cash flows, and the statement of Owner's Equity. The paper delves further into the history of the meaning and explanations of accruals and prepayments, accounting rules relating to accruals and prepayments, reforms proposed by the Financial Accounting Standards Board and the Accounting Standards Codification, and the effect of the steps on the accounting system.The definition of accruals and prepayments
An accrual is an entry which records revenue or expense in the absence of cash that is to mean, the entry is made when a transaction occurs. Examples of accruals include accrued wages and salaries.According to Maynard, Jennifer (860), a prepayment is an expense which has been paid but for which service has not been consumed. Examples of prepayments include prepaid rent and electricity expenses.Accounting principles and their relationship with accruals and prepayments
The matching principle
According to Weygandt, Jerry J. et al. (180), the matching principle is an accounting concept which requires an organization to charge the expenses when incurred and revenues when earned. The concept dictates how the accrued revenues and prepaid expenses are supposed to be recorded. Before the change by FASB, expenses were charged to the income statement during the period in which they were paid regardless of whether or not they related to the revenue related to the expense during that particular year.The matching principle also brought the idea of suing depreciation to account for non-current assets such as machinery. An example of the development is the International Accounting Standards (IAS) 20 which, according to Maynard, Jennifer (450), requires that "recognition of grants as income over the accounting periods in which the related costs that were intended to be compensated by the grant are incurred by the entry."The Accrual concept
The accrual concept is related to the matching principle in that the matching principle is a refinement of the accrual concept. The accrual concept requires that expenses and income be recognized in the same accounting periods to which they relate and not based on a cash transaction. However, the concept does not affect the cash flow (Weygandt, Jerry J., et al. 179).The realization concept
A realization concept states that the seller or the provider of a service should record revenue when earned regardless of a cash transaction (Weygandt, Jerry J., et al. 179). For example, when goods are sold on credit, the seller should record the sales as if though he or she received the cash. The amount should be credited to the customer's account.Recommended changes and the impacts on the
The Financial Accounting Standards Board recommended two classifications of the accrual expenses and revenues each. The classifications are accrual and prepayment income and expenses.When income is accrued, the amount is credited in the accrued income account and a corresponding debit entry on the account receivable. Accrued Expense is treated in the opposite manner in which a debit entry is made on the accrued expense account. A corresponding entry of account payable is credited with the amount in return.The treatment of prepayments is no different. The entries made in respect to the prepaid income are a debit on the prepaid income account to signify a liability and a credit entry in the income statement. A prepaid expense is treated by crediting the prepaid expense in the income statement and debiting the prepaid expense in a prepayments account.Measurement of revenue according to IAS 18
The International Accounting Standards 18 mentions that revenue should be measured at fair value. Besides, the chapter states that "exchange for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. However, exchanges for dissimilar items are regarded as generating revenue (Maynard, Jennifer 700)." Besides, the fair value of revenue would be considered to be lower than the nominal amount received or receivable if the inflow if cash is deferred.Conclusion
The global accounting bodies such as the Financial Accounting Standards Board (FASB), the International Accounting Standard come up with developments on the accounting events such as recognition of revenues and prepayments, recognition, and recording of intangible assets and the accounting principles. These measures are meant to ensure the accounting standards across the globe are simple, verifiable, reliable and similar. The accounting standards also promote the incorporation of developments in areas which affect accounting entries such as real estate which affect the accounting of leases. The paper has looked at the recognition of the accruals and prepayments in line with the IAS 18 and 20 and the recommendation of the FASB.Works Cited
Maynard, Jennifer. Financial accounting, reporting, and analysis. Oxford University Press, 2017.
Weygandt, Jerry J., et al. “Accounting principles.” Issues in Accounting Education 25.1 (2010): 179-180.
