Accrual Concept is one of the four fundamental accounting concepts which is laid down in Statement of Standard Accounting Practice 2, Disclosure of Accounting Policies. It is also recognized by the Companies Act 1985 and the EU Fourth Accounting Directive.
The Financial Reporting Standard 18 reaffirmed the importance of accruals concept which superseded SSAP 2 and International Accounting Standard 18.
The accrual concept requires the costs and revenue be recognized as they are incurred or earned not when the money is paid or received.
Income and expense need to be matched with each other as far as the relationship can be established or justifiably assumed and dealt with in the profit and loss account of the period to which they relate.
Accruals and prepayment are example of the use of accruals concepts in practical setting.
For instance, if a rates of bill for current and future period is paid, the part of future payment is carried forward as a current asset known as prepayment until it matched the future periods.