Accruals and prepayments, and the reversal that stops the double count

Two adjustments carry most of the weight in a close. One recognises a cost you have not been billed for; the other defers a cost you paid too early. Both are estimates, and both create an obligation to do something next month.

Accruals: the cost arrived before the invoice#

You used a month of electricity, or a contractor worked three weeks, and no bill has come. The cost belongs to this period regardless.

Account	Debit	Credit
6300 · Professional Fees	4,000.00
2150 · Accrued Liabilities		4,000.00
Total	4,000.00	4,000.00

Next period the accrual is reversed and the real invoice is entered normally. The reversal cancels the estimate; the invoice records the fact.

Skip the reversal and the expense is recognised twice — once as the accrual, once as the invoice — and the accrued liability sits on the balance sheet forever, growing by one estimate every month. It is one of the most common causes of an unexplained balance in a liability account.

The clean pattern is to date the reversal on the first day of the next period at the moment you post the accrual, so it cannot be forgotten. Many systems will do this automatically if you mark the entry as reversing.

Prepayments: the invoice arrived before the cost#

The mirror image. You pay twelve months of insurance in January. Only one month belongs to January.

Account	Debit	Credit
1400 · Prepaid Expenses	12,000.00
1000 · Bank		12,000.00
Total	12,000.00	12,000.00

Then each month releases a twelfth:

Account	Debit	Credit
6400 · Insurance	1,000.00
1400 · Prepaid Expenses		1,000.00
Total	1,000.00	1,000.00

Prepayments are more forgiving than accruals — the error is a timing misstatement rather than a double count — but the balance still has to be supported. A prepaid account nobody schedules becomes a place costs go to hide.

How much precision is worth it#

Not much, below a threshold. The purpose is a P&L that describes the period, not a perfect one. Accruing $80 of stationery adds noise and work; missing $40,000 of contractor cost changes the answer.

Pick a materiality level, write it down, and apply it consistently. Consistency matters more than the level, because inconsistency between periods is what makes comparison meaningless.

The supporting schedule is the control#

Both accounts should be backed by a list, not a balance:

• Accrued liabilities — every accrual, what it is for, and when it reverses.
• Prepaid expenses — every prepayment, its term, and the monthly release.

Then the reconciliation is a comparison rather than an investigation: does the schedule total equal the account balance? A difference means an accrual reversed that should not have, or one was never posted, or a release was missed.

That check belongs alongside the other reconciliations in the close sequence — and it is exactly why cash is reconciled before adjustments are posted. An accrual is a claim about what is missing from the ledger, and you cannot know what is missing until you know what is there.