Accruals and prepayments put costs in the month they belong to, not the month the invoice turned up.
Accrue costs you've incurred but haven't been invoiced for: debit the expense, credit accruals, and reverse it next month when the invoice arrives. For costs paid in advance, record a prepayment asset and release one period's share to expense each month. Support every accrual and prepayment balance with a schedule that ties to the ledger.
If you received goods or services this month but the invoice won't arrive until next month, the cost still belongs to this month.
Example: a contractor worked in March; the invoice for 4,000 is expected in April.
| Date | Entry | Debit | Credit |
|---|---|---|---|
| 31 March | Contractor costs (expense) | 4,000 | |
| 31 March | Accruals (liability) | 4,000 | |
| 1 April | Reverse: Accruals | 4,000 | |
| 1 April | Reverse: Contractor costs | 4,000 |
When the invoice is posted in April, it debits the expense; with the reversal, April's net cost is zero and March carries the cost correctly.
Estimate from purchase orders, contracts, the last invoice, or usage. Record the basis for each estimate.
If you pay for something that covers future months, only this month's share is an expense.
Example: annual insurance of 12,000 paid in January, covering January to December.
| Date | Entry | Debit | Credit |
|---|---|---|---|
| January (payment) | Prepayments (asset) | 12,000 | |
| January (payment) | Bank | 12,000 | |
| Each month end | Insurance expense | 1,000 | |
| Each month end | Prepayments | 1,000 |
At the end of March, the prepayment balance should be 9,000: nine months still to come.
For accruals: supplier, description, basis of estimate, amount, and the expected invoice month. For prepayments: supplier, total paid, period covered, monthly release, and balance remaining. The schedule total must agree to the ledger balance every month.
Both balances are reconciled as part of the balance sheet reconciliation process.
Terminology: UK teams say "accruals" and "prepayments"; US teams usually say "accrued expenses" (or "accrued liabilities") and "prepaid expenses". The entries are the same.
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So that when the real invoice is posted, the cost isn't counted twice. The reversal cancels the estimate and the invoice takes its place.
A reasonable estimate with a documented basis. Agree a materiality level so small items don't hold up the close.
An accrual is for a cost you know you've incurred, with little uncertainty. A provision covers a liability where the timing or amount is uncertain and needs more judgement.
Goods or services you have received and recorded as received, where the supplier's invoice hasn't been posted yet. The GRNI report from purchasing is one of the best sources for month-end accruals.
Set a threshold. Many teams expense small advance payments immediately and only create prepayments above a set amount, because tracking very small balances costs more than the accuracy is worth.
Last updated 18 October 2026. General guidance for finance teams; check it against your own policies, systems and local rules.