When an income and expenditure account is prepared on an accrual basis, it means that transactions are recognized when they are incurred or earned, regardless of when the cash is received or paid. The accrual basis of accounting recognizes revenues and expenses when they are earned or incurred, not necessarily when the cash is received or paid.

Here's how the accrual basis works in the context of an income and expenditure account:

Revenue Recognition:

• Income is recognized in the period in which it is earned, regardless of when the cash is received. For example, if an organization provides services in a particular month, the revenue from those services is recognized in that month, even if the payment is received in the following month.

Expense Recognition:

• Expenses are recognized in the period in which they are incurred, irrespective of when the actual payment is made. For example, if an organization incurs utility expenses in a particular month, those expenses are recognized in that month, even if the payment is made in the following month.

Matching Principle:

• The accrual basis of accounting follows the matching principle, which states that expenses should be matched with the revenues they help to generate.