{m}.{s}.1 Accruals (matching) concept

One of the fundamental accounting concepts is the accruals (or matching) concept. This tells us that revenues and costs are to be recognised as they are earned or incurred: not as they are actually received or paid. These revenues and costs will then be matched in the profit and loss account of the period to which they relate. This means that the profit calculated will be the revenues for the period less all the costs incurred in generating those revenues.

{m}.{s}.2 Profit and loss account

The revenues to be brought into the profit and loss account are those earned during the period of the accounts (usually a year). It is important that all the expenses that relate to that period, and only that period, are also included.

There are usually some expenses incurred that have not been billed at the year end. Similarly there are often expenses paid in advance. Accruals and prepayments adjustments must be made so that all the expenses of the year, and only the expenses of that year, are included.