Accruals Basis of Accounting

Financial statements are prepared under the Accruals Basis of accounting which requires that income and expense must be recognized in the accounting periods to which they relate rather than on cash basis. An exception to this general rule is the cash flow statement whose main purpose is to present the cash flow effects of transaction during an accounting period.

Under accruals basis of accounting, an entity must account for the following types of transactions:

• Accrued Income
• Accrued Expense
• Prepaid Income
• Prepaid Expense