Expenses and revenues provided and due

Expenses and revenues provided and accrued are fundamental concepts in accounting science and are closely related to the principle of accounting accrual. Mastering these concepts is an important condition for the correct preparation of financial statements that reflect the real performance of the entity during a specific financial period.

First: The principle of accounting accrual

The accrual principle states that:

"Income and expenses shall be recorded in the financial period to which they relate, regardless of the timing of collection or actual payment."

This means that the accountant does not rely only on cash operations (payment or collection) to determine revenues or expenses, but he must carry each financial period with its own costs or revenues, whether they are actually paid or collected or not. 

Second: Types of Expenses and Revenues

Expenses and revenues, depending on the timing of their recognition, are divided into four types:

1.  Advance Expenses

2.  Accrued expenses

3.  Revenue Provided

4.  Accrued revenue

We will explain each type with practical examples and accounting constraints. 

(a) Expenses Provided

Definition of expenses provided:

They are expenses that were paid during the current financial period, but they belong to a future financial period, and therefore the current period should not be charged to them in full. Rather, it is recorded as an asset (i.e. an entity's right) in the balance sheet, and is called an "advance paid expense".

Examples:

1.  Prepaid office rent for several months to come.

2.  Premiums paid in advance for the coming year.

Illustrative example:

On July 1, 2024, one establishment paid 12,000 riyals in rent annually. The monthly rent is 1,000 riyals, meaning that half of the amount (6,000 riyals) is for the period from July to December 2024, and the other half for the period from January to June 2025. 

Accounting treatment:

1.  When paying on 1/7/2024:

From rent 12,000 

To Fund 12,000

1.  When preparing the lists on 31/12/2024:

Post the undue part to the "Prepaid Allowance" account:

of prepaid expenses (advance rent) 6,000 

To the rent 6,000

1.  At the start of the New Year 1/1/2025:

Reload the deferred part on the new period:

From the rent 6,000 

To A/ Advance Expenses 6,000

  

(b) Accrued Expenses

Definition of accrued expenses:

These are expenses for the current financial period but have not been paid until the end of that period. Therefore, it is recorded as an expense in the income statement, and at the same time it appears as an obligation on the entity in the balance sheet under "accrued expenses".

Examples:

1.  Wages or salaries not paid until the end of the year.

2.  Unpaid electricity or water bills.

  

Illustrative example:

As of December 31, 2024, there were accrued expenses of SAR 15,000, which were subsequently paid at the beginning of 2025.

Accounting treatment:

1.  Proof of expense on 31/12/2024:

of Expense (e.g. salaries) 15,000 

To A/C 15,000 Accrued Expenses

1.  When paying in 2025:

of A/C 15,000 accrued expenses 

To A/Fund 15,000

 

 c. Revenues provided

Definition of income provided:

Revenues collected during the current fiscal period, but they belong to a subsequent financial period. It should therefore not be recognized as real revenue in the current period. It is recorded as an obligation on the entity in the balance sheet under "income collected in advance".

Examples:

1.  Collected services subscription for a full year in advance.

2.  Rent a property that has been collected for the coming months.

Illustrative example:

As of June 30, 2024, Monsha'a received SAR 14,000 in revenue, while the current financial period relates to only SAR 7,000.

 Accounting treatment:

1.  Upon delivery in 2024:

From A/Fund 14,000 

To A/ Revenue 14,000

1.  At the end of the year 31/12/2024:

Deportation of the undue part:

of 7,000 revenues 

To H/ Revenue collected in advance 7,000

1.  On 1/1/2025:

Reload revenue on the New Year:

of 7,000 advance revenues 

To H/ Revenue 7,000

 

 

 

 

(d) Accrued Revenues

Definition of accrued revenue:

It is revenue for the current financial period, but it has not yet been collected. It must be recorded in the income statement as revenue, and appear as an asset on the balance sheet under "accrued income."

Examples:

1.  Uncollected accrued bank interest.

2.  Services provided but not yet collected.

Illustrative example:

Monsha'A had accrued revenues of SAR 15,000 that had not been collected until the end of 2024, which were collected in January 2025.

Accounting treatment:

1.  On 31/12/2024:

of A/ Accrued Revenue 15,000 

To H/ Revenue 15,000

1.  When collecting in 2025:

From A/Fund 15,000 

To A/C 15,000 Accrued Revenue

 Understanding the expenses and revenues provided and accrued is essential for any accountant, as it contributes to the preparation of financial statements accurately that reflect the real performance of the entity. It shows the extent of the entity's commitment to the accrual principle, and prevents manipulation of financial results, whether by providing undue profits or delaying the recognition of losses.

By mastering the accounting constraints associated with these items, the accountant can enhance the reliability and transparency of financial statements, and ensure compliance with accounting standards adopted locally and internationally.