Quote:
| Originally Posted by vasugi what does depriciation, accural and prepayment mean and how to use it? |
Depreciation
This is the process of spreading the cots of a capital item over it’s useful life. Basically, when we buy a large piece of equipment for a business, it will be used for several years, not just for one year. Therefore, we must show this expense over the number of years we will use this machine. Typically, if a machine cost $100,000 and it will last ten years, the depreciation expense for this machine is $10,000 per year for ten years.
Accrual
Sometimes we use a product or service in a given month and do not get the invoice for this until a later date. Under Generally Accepted Accounting Principals, we need to match our Costs of doing business to the period in which we made money. Therefore, if our sales in January are $10,000 and we used hydro of $1,000 during the month – we will not get the hydro bill until February. Therefore, we need to accrue the hydro cost in January , before we actually pay the bill, so that we have the proper expense in our books at the end of January.
Prepayment
The same principal applies to Pre-Payment. We may have to pay to rent a photocopier for 3 months in advance. However, at the end of January, we only want to show our expense for one month. Therefore, two months of the payment is recorded as “Prepaid” expense in the balance sheet, instead of Office Expense in the Income Statement.
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