One of the way to know whether a business can survive is Profit achieved, calculated by the difference between Revenue and Expense in the P&L Account.
As noted during the #1SEM1Sistem seminar, expense that relate to the following month which have been paid in the current month shall be excluded from the current month calculation of profit.
Using accounting equation as basis, the transactions are as follows:
Asset + Expense = Liability + Equity +Revenue
Prepayment Account = Bank
(Debit: increase in asset = Credit: decrease in asset) CURRENT MONTH
Expense Account = Prepayment Account
(Debit: increase in expense = Credit: decrease in asset) NEXT MONTH
The expense shall be recognised next month. This focus on specific period of time when the revenue and expense are recognised is termed as matching concept.
Revenue is “matched” with Expense for the specific period of time to calculate Profit.**