is the Accruals or Matching Concept?
principle that final accounts should only include income and expenditure for a
particular financial year
we prepare double entry accounts we can do them in one of two ways:
record transactions in full when they occur. This is the most straightforward
accounting method but is not the most accurate.
business pays its annual (yearly) insurance bill now for three months of this
financial year and nine months of the next financial year. It records the following
Insurance (an expense)
or Cash (reduction of an asset)
Whilst this transaction accurately
shows the cash flow out of the business during this financial year, it does not
accurately represent the expense incurred by the business for this accounting
period (because £900 or 3/4 of the amount refers to the Insurance expense
in the next accounting period, and only £300 or 1/4 refers to the expense
for this period).
instead apply the Accruals or Matching Concept which enables businesses to more
accurately calculate profits and losses for a given accounting period.
transaction would again be recorded in full but this time a note would be made,
in this example to show that a proportion of the amount paid refers to the next
period, namely £900. This note takes the form of a Balance being Carried
Down to the next Accounting Period.
cash flow is accurately recorded (as above) but this method also ensures that
when Profit or Loss is calculated it is using only those expenses and revenues
which relate to that period of time. The remainder of the expense or revenue is
recorded, in this case, in the following period.
does however mean that a balance will often be remaining in an expense or revenue
account at the end of an acconting period. All balances on accounts are summarised
in the Balance Sheet, being vategorised as assets or liabilities.