Accruals and Deferrals of Costs and Revenues

Accruals and deferrals of costs and revenues are special accounting entries that ensure expenses and incomes are recognized in the appropriate reporting periods, aligning with the matching and prudence principles.

1. Accruals and Deferrals in Light of Accounting Principles

Accruals and deferrals are governed by the Accounting Act, particularly Article 39. They are closely related to the matching principle, which requires that expenses be recognized in the same period as the revenues they help generate. This ensures that financial statements accurately reflect the company’s financial position.

2. Types of Accruals and Deferrals

2.1. Prepaid Expenses (Active Accruals)

Prepaid expenses are costs paid in advance for goods or services to be received in future periods. They are initially recorded as assets and expensed over time as the benefits are realized. Examples include:

• Annual subscriptions paid in advance
• Prepaid insurance premiums
• Advance payments for rent
• Costs related to future marketing campaigns

2.2. Accrued Expenses (Passive Accruals)

Accrued expenses are liabilities for goods or services received but not yet paid for by the end of the reporting period. They ensure that expenses are recognized in the period they are incurred. Examples include:

• Salaries and wages payable
• Utilities consumed but not yet billed
• Taxes owed

3. Importance in Financial Reporting

Proper use of accruals and deferrals ensures that financial statements present a true and fair view of the company’s financial performance and position. It aligns expenses and revenues to the correct periods, aiding in accurate financial analysis and decision-making.