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ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Which statement best describes how the accruals (matching) concept applies to expenses in the statement of profit or loss?

Expenses are recognised in the period in which they are incurred, regardless of when cash is paid. This is the accruals concept: costs are matched to the period of benefit, so unpaid costs are accrued and amounts paid in advance are carried forward as prepayments.

  1. AExpenses are recognised when the cash is paid, whatever period the benefit relates to
  2. BExpenses are recognised in the period in which they are incurred, irrespective of when cash is paidCorrect
  3. CExpenses are recognised only when an invoice has been approved for payment
  4. DExpenses are recognised in the period in which the related budget was prepared

Explanation

Under the accruals concept, expenses are recognised when incurred, matched to the income they help earn, not when cash moves. Cash-basis recognition (option A) would ignore amounts owed or prepaid at the period end.

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