Accruals and Prepayments: How They Work and How to Post Them

An accrual is a cost you have already incurred but not yet been billed for. A prepayment is a cost you have already paid but not yet used. Both are month-end adjustments that move expenses into the period they belong to, so your profit figure reflects what happened in the business and not just when money left the bank.

This guide shows how each one works, the journal entries, a worked example in euro, a month-end routine you can repeat, and what Irish Revenue and auditors expect to see.

TL;DR

An accrual is an expense incurred but not yet invoiced or paid. It sits on the balance sheet as a current liability.
A prepayment is an expense paid before you receive the benefit. It sits on the balance sheet as a current asset and is released to the profit and loss account over time.
Accrual: debit the expense, credit accruals. Prepayment: debit prepayments, credit bank, then release monthly.
Revenue generally accepts accruals made in line with FRS 102 or FRS 105 as deductions, if the cost is not capital and the estimate is reliable.
Build a written accrual schedule each month from evidence, not memory, and reverse accruals on day one of the next period.

What accruals and prepayments are
Why they matter for an Irish SME
How to post an accrual
How to post a prepayment
A monthly accruals process you can repeat
Items small businesses most often miss
What Revenue says about accruals
Our perspective
When to hand this to an accountant
FAQ
Sources

What accruals and prepayments are

Both exist because of the accruals (matching) concept: income and expenses are reported in the period they occur, not when cash changes hands. OpenTuition's CIMA notes put it simply: the profit and loss account must show the income and expenses that belong to the period, not just the cash received and paid in it.

The two adjustments are mirror images:

	Accrual	Prepayment
What happened	Goods or services received, not yet invoiced or paid	Goods or services paid for, not yet received
Balance sheet	Current liability	Current asset
Effect on profit	Reduces profit this period	Increases profit this period (cost deferred)
Typical examples	Electricity used, accountancy fees, contractor hours, holiday pay	Annual insurance, software subscriptions, rent paid in advance

The Finance Book uses the same split: prepayments are goods or services paid for but not yet received, accruals are received but not yet invoiced or paid.

Why they matter for an Irish SME

Without these adjustments, your management accounts drift away from reality. A business that pays a €12,000 annual insurance premium in January looks wildly unprofitable in January and unusually profitable for the other eleven months. A business that receives its quarterly electricity bill in April shows no power cost for March, so margins look better than they were.

The same source notes that skipping the adjustments distorts management accounts and hides true cash flow and profitability. That matters when you are deciding whether to hire, price a job, or apply for a loan, because the numbers you read are the numbers you act on.

It also matters at year end. Auditors do not simply test recorded creditors. ISA (Ireland) 510 is the standard published by IAASA, and the material we have drawn on describes the search for unrecorded liabilities as looking at unmatched receiving reports, later payments and unpaid invoices. If an expense belongs to your year and is missing from your ledger, that is the kind of gap they hunt for.

How to post an accrual

The standard entry follows the pattern in the OpenTuition notes: debit the expense account, credit the accruals liability account. When the real invoice arrives, debit accruals to clear the balance and post the actual cost against the proper ledger code.

Worked example: electricity

Your year end is 31 December. You use electricity throughout the last quarter but the bill for October to December arrives in January. Based on previous bills and the meter reading, you estimate €900.

At 31 December: debit Electricity €900, credit Accruals €900.
In January the invoice arrives for €940.
Clear the accrual: debit Accruals €900. Post the invoice: debit Electricity €940, credit Creditors €940.
If you reversed the accrual on 1 January, the January electricity line then shows €40 net, which is the under-estimate, and no double-counting.

That last point matters. Reversing standard accruals automatically on the first day of the new period, as the accrual schedule guidance from Finance Ops Club recommends, stops the cost being counted twice when the invoice lands after the period has closed.

How to post a prepayment

A prepayment starts as an asset. You debit Prepayments and credit Bank when you pay. Then each month you release the portion used: debit the expense account, credit Prepayments. This is the amortising process described in the same OpenTuition notes.

Worked example: annual insurance

You pay €2,400 on 1 October for twelve months of cover.

1 October: debit Prepayments €2,400, credit Bank €2,400.
Each month: debit Insurance €200, credit Prepayments €200.
At 31 December: three months have been released (€600), so €1,800 remains on the balance sheet as a prepayment, covering January to September.

Some owners post the whole payment straight to the expense account and fix it at year end. That works for the annual accounts but leaves every monthly report wrong in between. If you rely on monthly figures, release it monthly.

The expense formula

When you want to check the P&L figure for a cost line, the formula is: expense for the period equals cash paid, plus opening prepayment, minus closing prepayment, minus opening accrual, plus closing accrual. It is a quick sense check on any line where you suspect the timing is off.

A monthly accruals process you can repeat

The discipline matters more than the entries. A typical month-end checklist, such as this month-end close template, places accruals and prepayments in the first ten days of the following month, after the payables and payroll subledgers are closed and cut off so late transactions are not missed. That template also treats accuracy as more important than speed.

For a small business, a workable version looks like this:

Close the sub-ledgers. Enter all supplier invoices dated in the month, and finalise payroll.
Build the accrual list from evidence. Start from open purchase orders, goods received but not invoiced, contracts with monthly fees, contractor timesheets and last month's list, as the Finance Ops Club schedule suggests. Do not work from memory.
Record the basis for each estimate. Hours worked multiplied by rate, order value, or a historical average. A reviewer should be able to recompute any figure.
Post the accruals and set them to reverse on day one of the next period.
Release prepayments. Update your prepayment schedule: what was paid, over what period, how much is left.
Reconcile. Tie the accruals and prepayments balances on the balance sheet to the schedules.
Review. Someone other than the preparer, or the owner, should challenge any large estimate before the numbers go out.

If you use Sage 50, note that it can post accruals and prepayments automatically at month end, but Sage's own guidance says the automatic feature is not available in Sage 50 Accounts Essentials and Standard. Check your edition before relying on it. In Xero and QuickBooks the same job is usually done with manual journals set to repeat or reverse, so the schedule matters even more.

Items small businesses most often miss

Holiday pay. Untaken leave at year end is a cost already earned by staff. Under Irish GAAP (FRS 102 or FRS 105) it must be accrued, and Revenue recognises holiday accruals as deductible where the calculation is sufficiently reliable.
Your own accountancy and audit fee. The work relates to the year, even if the invoice comes months later.
Contractor and subcontractor time worked but not yet invoiced.
Utilities and phone billed quarterly or in arrears.
Annual subscriptions, insurance and rent in advance, which belong partly to next year.
Interest and bank charges debited after the period end.

A useful habit: after year end, review every supplier invoice received in the first two months of the new year and ask which period the work belongs to. That is exactly the test auditors apply.

What Revenue says about accruals

For tax, Revenue's Tax and Duty Manual on provisions and accruals defines an accrual as a liability to pay for goods or services already received without formal confirmation of the amount. Its position is that provisions and accruals are treated as substantially the same for tax purposes. An accrual made in compliance with current Irish GAAP is generally acceptable as a deduction for income tax or corporation tax, provided the spending is not capital in nature and the estimate is sufficiently reliable.

Two practical takeaways:

Keep the working. An estimate backed by a schedule, a contract or timesheets is far easier to defend than a round number.
Capital items are different. An accrual for something that is capital expenditure does not become deductible simply because it is accrued.

If you are unsure whether a particular accrual is deductible, ask your accountant before you file the return.

Our perspective

Most errors we see are not about knowing the journal. They are about accruals and prepayments being treated as a separate year-end chore, handled by someone looking at the bank statement once a year. At Stratancy we see them as one link in a chain: bookkeeping feeds payroll and VAT, which feed the management accounts, which feed compliance filings. If one link is estimated loosely, the next one inherits the problem.

That is why our ACCA-qualified accountants work on cloud platforms such as Xero, QuickBooks and Sage, with schedules that sit alongside the ledger, not in someone's head. The aim is management accounts that show your actual performance and cash position each month, so you can decide on hiring, pricing or investment from numbers you trust.

Our advice to any owner: you do not need to master the journals, but you should insist on a written accrual and prepayment schedule that someone can recompute. If your accountant cannot show you one, ask for it.

— Stratancy

When to hand this to an accountant

If you are a sole trader with a handful of suppliers, a spreadsheet and a once-a-year adjustment may be enough. It stops being enough when you have staff, contractors, stock, deferred income, annual contracts, or when you need monthly reports for a bank, an investor or yourself.

Our management accounts service builds these adjustments into every monthly pack, and our bookkeeping service keeps the underlying ledger clean so the month-end work is short. Packages are published on our pricing page: for example Sole Trader Essential is from €129 per month, LTD Essential from €159 per month, and payroll is €25 per month per employee or director. Management accounts have no published price, so ask us for a quote.

If your books are behind, catch-up bookkeeping is from €35 per hour, which lets us get the ledger current before adjustments are layered on top.

FAQ

What is the difference between prepayments and accruals?

A prepayment is paid before you receive the goods or service, so it is an asset that you release to expenses over time. An accrual is a cost you have received but not yet been billed for, so it is a liability recorded now. Both ensure expenses land in the correct period.

Do I need accruals and prepayments if I am a sole trader?

If you prepare accounts on an accruals basis, yes, though the scale is small. Typical items are annual insurance, software subscriptions and unbilled professional fees. If you prepare accounts for tax on another basis, check with your accountant which one applies to you.

Are accruals tax deductible in Ireland?

Generally yes, where the accrual complies with FRS 102 or FRS 105, is not capital in nature and is estimated reliably, according to Revenue's guidance. Keep the supporting calculation. For a borderline item, ask your accountant before filing.

How do I record accruals and prepayments in my journal?

For an accrual, debit the expense and credit accruals, then clear it when the invoice arrives. For a prepayment, debit prepayments and credit bank, then debit the expense and credit prepayments each month as it is used. Setting accruals to auto-reverse on the first day of the next period avoids double-counting.

When should I do them each month?

After the month closes, once supplier invoices and payroll are entered. A common close schedule completes these adjustments within the first ten days of the following month, which is the timing used in this close template.