Bookkeeping basics
Accruals and prepayments
Expense = paid − opening accrual + closing accrual + opening prepayment − closing prepayment.
Draft: not yet reviewed by a teacher
Why it exists
The accruals concept matches income and expenses to the period in which they arise, not the date cash moves. Otherwise profit would depend on when the electricity bill arrived or when the rent was paid.
Key rules
- An accrual (accrued expense): the service was received but not paid for. Dr Expense, Cr Accruals; a liability.
- A prepayment: paid for a future period. Dr Prepayments, Cr Expense; an asset.
- Amounts are time-apportioned: a year's rent paid on 1 April belongs 9/12 to this year.
- Last year's accruals and prepayments reverse on the first day of the new year: they become the expense account's b/d balances.
- An accrual reduces profit and net assets; a prepayment increases both.
Examples
Rent of 7,200 paid on 1 April 2026 for 12 months; the year ends on 31 December.
- 2026 expense: 7,200 × 9/12 = 5,400
- Prepayment at 31 December: 7,200 × 3/12 = 1,800
- Dr Prepayments 1,800, Cr Rent 1,800
Electricity: opening accrual 350, paid in the year 3,100. The December–February bill of 840 arrives in March.
- Accrual for December: 840 × 1/3 = 280
- Expense: 3,100 − 350 + 280 = 3,030
- Account: Dr Bank 3,100, Balance c/d 280 = 3,380; Cr Balance b/d 350, P/L 3,030 = 3,380
How it works
In the expense account, the debits are the payments and the closing accrual (c/d); the credits are the opening accrual (b/d) and the closing prepayment (c/d). The difference is the year's expense, transferred to profit or loss.
In the statement of financial position, accruals are current liabilities and prepayments current assets.
Traps
Taught in the course
- The electricity bill arrives in FebruaryFA 6 · Accruals, prepayments, accrued income and deferred income
- Four journal entriesFA 6 · Accruals, prepayments, accrued income and deferred income
- The rent account for the yearFA 6 · Accruals, prepayments, accrued income and deferred income
- Kamran's workingsFA 6 · Accruals, prepayments, accrued income and deferred income
- Exam-style practiceFA 6 · Accruals, prepayments, accrued income and deferred income
- Chapter bossFA 6 · Accruals, prepayments, accrued income and deferred income