Adjustments to draft financial statements

Need to know

What you need to know

• The accruals concept matches expenses incurred with revenues earned in the same period.
• It focuses on when an economic event occurs, not when cash is exchanged.
• Adjustments are required to correct the draft accounts to comply with this principle.
• This concept directly leads to the creation of accrued expenses (liabilities) and prepaid expenses (assets).

Explanation

Adjustments to draft financial statements

1. The accruals concept matches expenses incurred with revenues earned in the same period.
2. It focuses on when an economic event occurs, not when cash is exchanged.
3. Adjustments are required to correct the draft accounts to comply with this principle.
4. This concept directly leads to the creation of accrued expenses (liabilities) and prepaid expenses (assets).