Revenue and costs must be recognized as they are earned or incurred, not as money is received or paid. They must be matched with one another so 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. Therefore all incomes and expenses that relate to a particular financial period will be matched together to determine the profit for the year.
Accruals
Income: Accrued Income
This is income that relates to the current year but cash has not yet been received. An accrued income should be reported in the profit & loss account and the same income will be shown in the statement of financial position as a current asset. Although the cashbook is showing that rent received amounts Sh.22,000, the full rental income of Sh.24,000 will be reported in the Profit & Loss a/c as rent income and the accrued rent for Dec of Sh.2,000 will be reported in the statement of financial position as a current asset.
Expenses: Accrued Expenses
An accrued expense is an expense that is payable or due for payment but has not yet been paid during that period.
An accrued expense should be charged in the P&L account and shown in the statement of financial position as a current liability. The cashbook shows that the rent for the 11 months was paid for. However in the profit and loss account we should report rent for the full year of Sh.24, 000 and the Sh.2, 000, rent for Dec being the accrued expense will be shown in the statement of financial position as a current liability.