Accruals and Prepayments
Accruals and Prepayments are adjustments which Accountants make to Accounts to make them make more sense. They are used in Monthly Management Accounts and the more traditional Year End Accounts.
Accruals and Prepayments are used to fill a gap in Accounts to help the reader more easily understand the Accounts. They are also used to smooth a large expense over a year, rather than it just appear in a single month and look odd. There can also be a tax advantage or disadvanage - so beware.
For example, what do you do if your year end is 31st December, and your gas bill arrives a week later dated 4th January with a meter reading dated 30th December - it happens!
You might think the bill has missed the year end cut off and you can't get tax allowance on it until the next year. Not so! The HMRC understand this and will allow you to make an Accrual. Accountants do this type of adjustment all the time - they are trained to be on the look out for when it is necessary / desirable / sensible allowable.
Accruals
An Accrual is an adjustment to the Accounts for a cost or expense which hasn't gone into the Accounts in the normal way.
Here are several examples of Accruals:
Staff being late in submitting expense claims
Gas and electricity bills / meter readings up to the year ends
Deliveries not yet invoiced by the supplier
Building repair work done but not invoiced
The accounting bill for the year in question
Legal and other professional expenses not billed
As long as the work has actually been undertaken before the accounting reporting date, the above Accruals are allowable for Income and Corporation Tax claims - but not VAT, you need the invoice to claim the VAT.
Prepayments
A Prepayment is an adjustment to the Accounts when a significantly large cost or expense is incurred in advance, or partly in advance of the period to which it relates.
Here are some examples of Prepayments:
Business Rates (unless paid monthly - depending on how you account for it)
Insurance (unless paid monthly)
Annual advertising (eg. Yellow Pages - unless paid monthly)
Professional subscriptions (unless paid monthly)
Accountants usually try and 'smooth' these over all the relevant months in the future - up to the expiry date. The Accounts make more sense this way.