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Expenses Paid in Advance and in Arrears Print E-mail


Accrued expenses
You can deduct all expenses invoiced for the whole accounting period from sales. It will go towards reducing the tax liability calculated on taxable profit. If invoices have not been paid at the year end they will not be in the cashbook summary. Therefore, bring them into the accounts by making up a list of all unpaid invoices. Be careful of double counting invoices already included in trade creditors.

The accounting entry is:

  • Dr Expenses (profit and loss account)
  • Cr Accruals (balance sheet liability)

The total accrued expenses are included in the balance sheet under current liabilities and shown in a seperate line in a note to the accounts.


Accrued expenses


Net: income statement

Accrued expenses

(Net): balance sheet

When accounts are prepared, the accrued expenses included in the previous balance sheet are reversed by using an accounting entry (cr expenses, dr accruals). Alternatively, the payment of the invoice is recorded in the balance sheet to clear out the accruals during the following accounting period (dr accrual, cr cash).  

Prepaid expenses

Expenses such as rates are paid in advance. You can exclude the portion belonging to next year from the profit and loss account to show the real profit from year to year by placing it on the balance sheet and releasing it to the profit and loss account as the service is used up.

Say four months of next year's rates have already been paid by the year end, and the full amount of the rates for 12 months is £1,000. The amount to include as a prepayment will be £333.33 (£1,000 x 4/12). The accounting entry is:

  • Dr Prepayment (balance sheet asset)
  • Cr Expenses (Profit & Loss account)

Make a list of all prepaid expenses and record how next year's portion have been calculated, as you will need to be able to explain it to the accountant and possibly the tax authority. Prepayments included in the accounts increase profit and the tax liability for the year.

The prepaid portion of each expense is deducted directly from the total of that expense for the year in the profit and loss account. The total of the prepaid expenses is shown in the balance sheet under current assets and in a seperate line in the notes to the accounts. The balance sheet will balance because you have adjusted current assets and accumulated profit by the same amount.


Prepaid expenses


(Net): income statement

Prepaid expenses

Net: balance sheet

Only registered users can write comments!
Hafeni felishberto  - Accounting   |91.203.96.xxx |2012-06-19 14:52:04
In the balance sheet,prepaid expense and accrued income will be entered with
Nicole   |31.114.213.xxx |2012-06-28 16:32:56
In the balance sheet, prepayments are included within debtors due in less than
one year, and accruals are included within creditors due in less than one year.
Both are valued at the invoiced amount.

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