Accruals and Prepayments at Month-End

One principle, two directions

An accrual recognises an expense genuinely incurred even though no cash has moved and no bill has arrived.

A prepayment recognises that cash already paid covers a future period, so it should not all hit this month’s profit.

Both exist for the same reason. They are the matching principle applied in opposite directions — one pulling a cost forward into the period it belongs to, the other pushing one out.

The accrual entry

December’s electricity usage is real, but the utility’s billing cycle means the invoice will not arrive until mid-January. Wait for the bill and December understates its costs.

The entry: debit Electricity & Utilities Expense, credit Accrued Expenses (a liability) for the best reasonable estimate of December’s usage. The cost lands in the period it was incurred, not the period the paperwork showed up.

Reversing it when the real bill arrives

This is the step people skip, and it is what keeps the estimate from becoming a double count.

When January’s actual bill arrives covering December’s usage, reverse the accrual — debit Accrued Expenses, credit Electricity & Utilities Expense — then post the real bill normally through the purchase cycle. Net effect: the estimate is replaced by the actual figure, with nothing counted twice and nothing missed.

The prepayment, properly understood

A full year’s rent of ₹5,40,000 paid upfront in April was never a ₹5,40,000 rent expense in April. It was a Prepaid Expenses asset of ₹5,40,000, released to Rent Expense one-twelfth at a time — ₹45,000 a month across the year it actually covers.

Expense it all in April and April carries eleven months of someone else’s cost, while every month after it looks artificially profitable.

Does a bill arriving after close need an accrual?

A genuine supplier bill for November services arrives on 2 December. Accrual needed?

It depends on one thing: whether November’s close has already happened. If it has, the expense genuinely belongs to November and a prior-period consideration applies. If the books are still open, it is simply a normal November expense, posted normally — no accrual needed, because the actual bill is in hand before close.

The determining question is always which period the expense belongs to, and whether that period’s close has already run.

Why accruals come after cut-off, not before

In a close checklist this is deliberately an adjustment-stage item, placed after cut-off and subledger checks are confirmed.

You need to be confident about what is genuinely in and out of the period before you can judge what still needs accruing or deferring. Run it in the wrong order — accruing before cut-off is confirmed — and you risk accruing for something already captured elsewhere.

Common mistakes

• —Posting the accrual and never reversing it, so the cost is counted twice.
• —Expensing an annual prepayment in full in the month it was paid.
• —Accruing before cut-off is confirmed, duplicating something already posted.
• —Treating “no bill received” as meaning no expense was incurred.
• —Leaving the accrued expenses and prepaid expenses balances unreviewed from month to month.