The Finance Book, 2nd Edition

13 Prepayments and accruals

‘Accounting is accrual profession.’

Anonymous

In a nutshell

Prepayments (prepaid expenses)	Accruals (accrued expenses)
Goods or services which have been invoiced and paid, but not yet received.	Goods or services which have been received, but not yet invoiced or paid.

Prepayments and accruals are both examples of the ‘matching’ concept (somewhat confusingly also known as the ‘accruals’ concept) (see Chapter 1 Business accounting). The objective is to match expenses to the period in which they are incurred, as opposed to paid.

One of the key things to be aware of is the dual impact of accruals on a business’s financial statements.

Need to know

Essentially, prepayments and accruals can arise where ...