Accrued revenue and prepaid expenses are examples of what?

Accrued revenue and prepaid expenses exemplify the principles of accrual accounting, which focuses on recognizing revenues and expenses when they are earned or incurred, rather than when cash is exchanged.

Accrued revenue refers to income that has been earned but not yet received in cash; for instance, a company providing services or goods that will be billed later. This reflects the accrual concept since the revenue is recognized when the service is performed, not when payment is received.

Prepaid expenses represent payments made in advance for goods or services that will be received in the future, such as insurance or rent. Under accrual accounting, these expenses are recognized over the period they benefit.

Both accrued revenue and prepaid expenses highlight an essential characteristic of accrual accounting: the matching principle, which ensures that revenues and their associated expenses are recorded in the same accounting period, thereby providing a more accurate financial picture of a company's performance. This principle is what distinguishes accrual accounting from cash basis accounting, where such transactions wouldn't be recognized until cash changes hands.

Understanding this concept is crucial for accurately interpreting financial statements and recognizing how income and expenses impact a company's financial position over time.