A November payment can relate to October’s electricity. An October payment can cover insurance for the next twelve months. The bank date tells you when cash moved. To close the accounts, you also need to know when the service was received or the benefit was consumed.
Accrued and prepaid expenses deal with those timing differences. The starting point is the service period, supported by a bill, contract, usage record or another reasonable basis. This guide uses simple examples without GST or withholding entries.
The difference at a glance
| Question | Accrued expense | Prepaid expense |
|---|---|---|
| What has happened? | The service has been received and an expense needs recognition before the final bill or settlement | Payment relates to a benefit to be consumed in a future period |
| Typical month-end balance | Liability | Asset for the unexpired benefit |
| Example | October electricity billed in November | Annual insurance paid before coverage is consumed |
| Next action | Compare the estimate with the invoice and clear the accrual | Release the cost to expense over the benefit period |
An unpaid supplier invoice already booked to accounts payable normally has its liability recorded. Check existing AP and GR/IR entries before adding an accrual for the same cost. Otherwise, the expense and liability can be counted twice.
Accrual example for an electricity bill
At 31 October, the electricity invoice is unavailable. Meter readings, the tariff and recent usage support an estimate of ₹45,000 for October. The closing entry is Electricity expense Dr ₹45,000 and accrued expenses Cr ₹45,000. Keep the calculation and the service dates with the journal.
The invoice arrives in November at ₹47,000, relating entirely to October. Under a direct-clearing approach, debit accrued expenses ₹45,000, debit electricity expense ₹2,000 and credit vendor payable ₹47,000. The accrual is cleared and the difference remains visible. The period in which that difference is recognised depends on the close status, materiality and applicable accounting requirements.
Some organisations reverse the ₹45,000 accrual at the start of November and then book the full ₹47,000 invoice. In that approach, November has a net ₹2,000 expense effect from these two postings. Use either the approved reversal process or direct clearing for the item. Applying both creates a double reversal.
Prepayment example for annual insurance
Assume ₹1,20,000 is paid for insurance covering 1 October 2026 to 30 September 2027. At payment, debit prepaid insurance ₹1,20,000 and credit bank or the relevant payable ₹1,20,000. If the benefit is consumed evenly and the policy uses equal monthly allocation, October’s expense is ₹10,000.
At October close, debit insurance expense ₹10,000 and credit prepaid insurance ₹10,000. The remaining asset is ₹1,10,000. Another ₹10,000 is released each month through September. For a policy beginning partway through a month, use the organisation’s documented day-based or other appropriate allocation method. The contract and consumption pattern matter more than convenience.
Use schedules that show the movement
| Schedule | Useful columns | Roll-forward |
|---|---|---|
| Accruals | Supplier, service period, basis, opening balance, new accrual, clearing entry, closing balance, owner | Opening accrual + additions − amounts cleared = closing accrual |
| Prepayments | Contract, coverage dates, opening asset, new payments capitalised, expense release, closing asset | Opening prepaid asset + additions − expense recognised = closing prepaid asset |
For each closing accrual, check whether the invoice has since arrived and whether the estimate still has a basis. For each prepayment, check that the future benefit still exists and the amortisation end date agrees with the contract. Tie both schedules to their general-ledger control accounts.
Month-end checks worth keeping
- Confirm the correct service or coverage period.
- Search AP and GR/IR for an existing posting before adding an accrual.
- Use a supported estimate and label the estimation basis.
- Record the reversal or clearing reference against the original item.
- Investigate accruals that remain unchanged for several closes.
- Stop prepayment releases at the contract end date and review cancellations.
- Obtain approval for adjustments and keep evidence with the journal.
A difference between the estimate and the bill is useful feedback. If the same account repeatedly needs large adjustments, improve the estimation basis. A clearer meter reading, service confirmation or contract schedule usually helps more than carrying forward last month’s journal unchanged.
- IFRS Foundation IAS 1, accrual basis paragraphs 27–28
- Accounts payable process
- GR/IR reconciliation at month-end
Prepared by the TaxNexus Editorial Team. Last reviewed 6 November 2026. All amounts and business records in the worked examples are illustrative. Apply your organisation’s accounting policies and review the applicable tax treatment before posting entries.
