1. The problem is to understand the concepts of accruals and prepayments in accounting. 2. Accruals are expenses or revenues that have been incurred or earned but not yet recorded in the accounts. 3. Prepayments are payments made in advance for expenses or revenues that will be incurred or earned in the future. 4. The formula for accruals is: $$\text{Accrual} = \text{Expense or Revenue incurred} - \text{Amount recorded}$$ 5. The formula for prepayments is: $$\text{Prepayment} = \text{Amount paid} - \text{Expense or Revenue incurred}$$ 6. Important rules: Accruals increase expenses or revenues in the current period even if cash has not been exchanged. 7. Prepayments decrease expenses or revenues in the current period because the payment relates to future periods. 8. Example: If a company owes 100 for electricity used but not yet paid, accrual is 100. 9. If a company pays 120 for insurance covering next 12 months, prepayment is 120 minus the portion used in the current period. 10. These adjustments ensure financial statements reflect the true financial position and performance.