Cash versus accruals accounting
If you record all your transactions on the date that you write your cheques, you are operating a cash accounting system. An example is when you pay your office rental costs for a year in advance and record it all in your office rents account when the cheque is processed.
For management purposes, it is more instructive to charge one-twelfth of the total to rents each month during the year. You can then see more accurately what your costs and revenues were in any one month. In this example, when the payment is made you credit bank and debit the asset account prepaid rents. Then, each month for 12 months, you credit prepaid rents and debit the expense account office rents. The first step is to record the actual payment: ...
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