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Revenue is recognised when the cash is received.
Expenses are recognised when the cash is paid.
Revenue is recognised when goods and services are provided.
Expenses are recognised when assets are consumed or liabilities incurred.
The Matching Principle
In order to accurately assess the performance of an entity for an accounting period, the revenues earned in that period should be matched with the expenses incurred in earning that revenue.
Need for Adjusting Entries
Revenues and expenses are recorded in the correct accounting period.
Recognition criteria are followed for assets, liabilities, revenues and expenses.
Adjusting Entries - Prepayments
Prepaid Expenses - Amounts paid in advance, in cash and recorded as assets until used.
Revenue Received in Advance - Amounts received from customers and recorded as a liability until services performed or goods delivered.
Adjusting Entries - Accruals
Accrued Revenues - Amounts not yet received and recorded for which goods or services have been provided.
Accrued Expenses - Amounts not yet paid or recorded for goods or services already received.