Accrual basis states that all transactions must be reported into the period of which they relate to.
Prepaid advertising of $300will be reported in the financial statements by adjusting the trial balance. We will have to create a new account called Prepayments which is a current asset. There we will add the full $300 of the prepayment into that account then decrease the account advertising by $300 as it does not relate to the period that it is getting reported. The total of $300 can not be reported in the income statement until the next year or the period that it relates to.
From there, in the Income Statement, Advertising will be entered into Distribution Costs or Group 1 and the new amount will be entered there. In the balance sheet, the account prepayment will be entered as a current asset and the $300 will be reported into the statement. Prepayments clearly shows that the $300 does not relate to this accounting period as they will receive the benefit of the prepayment in the coming period.
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