Prepayments, Accruals, and Deferred Income
In Chapter 8, Best Practices When Reviewing Financial Records, we introduced some standard accounting principles and concepts, including the matching concept, the accruals concept, and income recognition.
These concepts are similar in the sense that the values that are reported on a profit and loss report might not reflect the dates invoices were raised or the supplier bills were received. Instead, values are adjusted to reflect dates when work was carried out, or to a period that it relates to, regardless of when the fees were charged.
Let's look at an example of a large consultancy company. They are working for an international corporate client. They have been advised to raise an invoice in advance for the next quarter for £60,000.
After raising the invoice, the income within the Profit and Loss report will immediately show a value of £60,000 against 1 month:
Figure 9.11 – Profit and loss...