Identify, and briefly explain, the basic accounting principle which requires prepayments to be included in final accounts. (3 marks)
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The accruals or matching concept requires that the revenue earned in a period is matched with the expenses incurred in earning that profit. Therefore if a payment includes a prepayment for the following period, this must be excluded from ex-penses in the statement of profit or loss. In other words, cost are recognised on the basis of the period covered by those costs, not by the timing of the payment.