4.3 Other Payables and Other Receivables

2026 Syllabus Objectives

By the end of this topic, you should be able to:

  1. Recognise the importance of matching costs and revenues
  2. Prepare ledger accounts and journal entries to record accrued and prepaid expenses
  3. Prepare ledger accounts and journal entries to record accrued and prepaid incomes

1. The Matching Principle

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What does "matching costs and revenues" mean?

In accounting, there is an important rule called the matching principle (sometimes called the accruals concept). This rule says:

Every expense and every income must be recorded in the financial period in which it actually belongs — not necessarily when cash is paid or received.

Think of it this way: if your business rents a shop for the month of December but pays the rent in January, that rent expense still belongs to December. It must appear in December's accounts, because that is the period the rent was used.

Why does this matter?

  • If you only recorded expenses when cash left your account, your accounts would give a misleading picture of how your business performed.
  • The matching principle makes sure your income statement (the report showing profit or loss) gives an accurate, fair view of the business's performance for that specific time period.
  • It ensures costs are "matched" to the revenues they helped generate.

Two situations arise from this principle:

SituationName
You owe an expense but haven't paid it yetAccrued expense (accrual)
You have paid an expense that covers a future periodPrepaid expense (prepayment)
You are owed income but haven't received it yetAccrued income
You have received income that belongs to a future periodPrepaid income

2. Accrued and Prepaid Expenses

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What is an Accrued Expense?

An accrued expense is an expense that has been used during the financial period but has not yet been paid by the end of that period. It is sometimes called an accrual, or described as being "in arrears."

Simple example: Your financial year ends on 31 December. Your electricity bill for December is USD 200, but the bill doesn't arrive and get paid until January. That USD 200 is an accrued expense — it belongs to December's accounts even though no cash has left yet.

Key point: An accrued expense is a liability (a debt the business owes). The business used the service but hasn't paid for it yet.

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