The Idiot-Proof Guide to Accruals &
Prepayments (Timing is Everything!)
🎯 THE TL;DR (Too Long; Didn't Read)
In accounting, we only care about the expenses you actually used during the
year, not the cash you paid. Accruals add unpaid bills to your expenses, while
Prepayments remove expenses you've paid for but haven't used yet.
🧠 THE GOLDEN RULE(S)
The Matching Concept: You must match expenses to the exact period they were
incurred, regardless of when the cash leaves your bank account.
- Accruals: You used it, but haven't paid yet (You Owe = Liability).
- Prepayments: You paid for it, but haven't used it yet (They owe you =
Asset).
🛠️ THE 5-STEP BLUEPRINT TO PERFECT ADJUSTMENTS
When an exam question asks you to find the final Expense for the Statement of
Profit or Loss (SOPL), follow these exact chronological steps using a T-Account.
Step 1: Reverse the Opening Balances (From Last Year) Always start by clearing
out last year's leftovers from your Expense account.
- Opening Accrual: You paid it this year, but it belongs to last year. Credit
the Expense account.
- Opening Prepayment: You paid it last year, but it belongs to this year.
Debit the Expense account.
Step 2: Record the Cash Paid This Year Enter the total cash physically paid
during the current year.
- Action: Debit the Expense account, Credit Cash.
Step 3: Calculate the Year-End Adjustment Read the dates carefully! Figure out
exactly what is owed or prepaid at the stroke of midnight on the last day of
your financial year.
- Micro-example: Year-end is Dec 31. On Dec 1, you paid $300 for 3 months of
internet (Dec, Jan, Feb).
- Calculation: You only used 1 month (100). You prepaid 2 months (200). Your
closing prepayment is $200.
Prepayments (Timing is Everything!)
🎯 THE TL;DR (Too Long; Didn't Read)
In accounting, we only care about the expenses you actually used during the
year, not the cash you paid. Accruals add unpaid bills to your expenses, while
Prepayments remove expenses you've paid for but haven't used yet.
🧠 THE GOLDEN RULE(S)
The Matching Concept: You must match expenses to the exact period they were
incurred, regardless of when the cash leaves your bank account.
- Accruals: You used it, but haven't paid yet (You Owe = Liability).
- Prepayments: You paid for it, but haven't used it yet (They owe you =
Asset).
🛠️ THE 5-STEP BLUEPRINT TO PERFECT ADJUSTMENTS
When an exam question asks you to find the final Expense for the Statement of
Profit or Loss (SOPL), follow these exact chronological steps using a T-Account.
Step 1: Reverse the Opening Balances (From Last Year) Always start by clearing
out last year's leftovers from your Expense account.
- Opening Accrual: You paid it this year, but it belongs to last year. Credit
the Expense account.
- Opening Prepayment: You paid it last year, but it belongs to this year.
Debit the Expense account.
Step 2: Record the Cash Paid This Year Enter the total cash physically paid
during the current year.
- Action: Debit the Expense account, Credit Cash.
Step 3: Calculate the Year-End Adjustment Read the dates carefully! Figure out
exactly what is owed or prepaid at the stroke of midnight on the last day of
your financial year.
- Micro-example: Year-end is Dec 31. On Dec 1, you paid $300 for 3 months of
internet (Dec, Jan, Feb).
- Calculation: You only used 1 month (100). You prepaid 2 months (200). Your
closing prepayment is $200.
