The matching principle
Costs and revenues must be matched to the same period — this follows the matching principle.
- Accrued expenses — expenses that have been incurred but not yet paid.
- Prepaid expenses — expenses that have been paid in advance but not yet incurred.
- Accrued income — income that has been earned but not yet received.
- Prepaid income — income that has been received but not yet earned.
How they are treated
| In the statement of financial position | In the income statement |
|---|---|
| Current assets: prepaid expenses, accrued income. | Anything accrued is added. |
| Current liabilities: accrued expenses, prepaid income. | Anything prepaid is deducted. |