accruals concept

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One of the four fundamental accounting concepts laid down in Statement of Standard Accounting Practice (SSAP) 2, Disclosure of Accounting Policies; it is also recognized in the Companies Act (1985) and the EU's Fourth Accounting Directive. It requires that revenue and costs are recognized as they are earned or incurred, not as money is received or paid. Income and expenses should be matched with one another, as far as their relationship can be established or justifiably assumed, and dealt with in the profit and loss account of the period to which they relate. Accruals and prepayments are examples of the application of the accruals concept in practice. For example, if a rates bill for both a current and future period is paid, that part relating to the future period is carried forward as a current asset (a prepayment) until it can be matched to the future periods.

The importance of the accruals concept was reaffirmed in Financial Reporting Standard 18, which has now superseded SSAP 2.

Subjects: Financial Institutions and Services — Accounting.

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