Accrual Accounting

What accrual accounting covers

Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash moves. It is what separates profit from cash flow, and it is the reason a profitable business can still run out of money. Accruals recognise amounts before cash settles; prepayments and deferred revenue defer amounts until the obligation is met.

Challenges here ask you to convert cash-basis information to an accrual basis and to post the accruals, prepayments and deferrals that follow.

Where marks are usually lost

• Recognising revenue when cash is received rather than when the performance obligation is satisfied.
• Expensing a prepayment in full instead of carrying the unused portion as an asset.
• Omitting the reversing effect in the following period, so the same expense is counted twice.