The matching principle requires expenses to be reported in the same period as the revenues earned as a result of the expenses, not before and not after. Accrual basis accounting improve the comparability of financial statements. At the end of an accounting period there are accounts that need to be adjusted to recognize revenues earned and expenses incurred during the period that are not yet recorded. An adjusting entry is also necessary to bring some asset or liability account balances to their proper amount at the end of the accounting period. Prepaid expenses-items paid for in advance of receiving their benefits.
Prepaid expenses are assets.
As these asset are used to produce revenue, their costs become expenses. Common prepaid items include supplies, prepaid insurance, and prepaid rent. The accumulated depreciation account is classified as a contra-asset account. It is linked to the asset as a subtraction and thus used to record the declining asset balance. Unearned Revenues-are liabilities created by the receipt of cash from customers in payment for products or services that have not yet been delivered to the customer.