Prepaid and accrual schedules
Lesson 9's adjustments, run forward: the insurance released to zero, a mid-month prepaid on two conventions, and September's power accrual reversed and trued up when the bill arrives.
Lesson 9 made September's adjustments once. In a real set of books each of them is the first row of a schedule that runs until the balance is gone: a prepaid released month after month, an accrued expense that meets its bill. The schedule is the evidence behind every month's entry, and its remaining balance is what the balance sheet must show.
The insurance, all twelve months
At every month end the schedule's remaining balance is tied out to 1400 Prepaid insurance. At October 31 that's $6,000. If the ledger says anything else, a release was missed or posted twice, and the schedule says which month.
A prepaid that starts mid-month
Pay a year of inventory software up front. Cash out, and an asset until it is used.
| Account | Debit | Credit |
|---|---|---|
| 1410Prepaid software | 1,200.00 | |
| 1000Cash — operating | 1,200.00 | |
| Balanced | 1,200.00 | 1,200.00 |
OCT-7
Evenly by month
- Good at
- Simple to compute and to check
- The same figure every month
- Watch for
- Charges a full month for a part month
- The schedule's months don't match the service period's
- Best for
- Small prepaids where a few days either way is immaterial
By days of service
- Good at
- Expense follows the days actually covered
- What a reviewer will recompute
- Watch for
- A stub at each end
- One more month-end on the schedule
- Best for
- Policies and contracts that start mid-month, or anything material
The accrual meets the bill
September accrued $450 of power nobody had billed (AJE-3). On October 1 Northwind posts a reversing entry that cancels it. On October 9 the real bill arrives for $472.80, and it's booked like any other bill, straight to utilities expense. The reversal already took the estimate back out, so October carries only the difference, a $22.80 true-up.
Reverse September's power accrual (AJE-3), so the real bill can be booked as usual.
| Account | Debit | Credit |
|---|---|---|
| 2200Accrued liabilities | 450.00 | |
| 6500Utilities expense | 450.00 | |
| Balanced | 450.00 | 450.00 |
OCT-1
September's power bill arrives. Booked as an ordinary bill; the reversal already took the estimate out.
| Account | Debit | Credit |
|---|---|---|
| 6500Utilities expense | 472.80 | |
| 2000Accounts payable | 472.80 | |
| Balanced | 472.80 | 472.80 |
OCT-6
Wrong
Oct 9 Dr 6500 472.80 / Cr 2000 472.80 2200 still shows 450
Right
Oct 1 Dr 2200 450 / Cr 6500 450 Oct 9 Dr 6500 472.80 / Cr 2000 472.80
Without the reversal, September's power is expensed twice — once as the accrual, once when the bill is coded — and accrued liabilities keeps a balance nobody is owed.
Step 1: List what's open
Prepaids: every invoice paid ahead. Accruals: every cost used and not yet billed — utilities, contractors, professional fees, interest.
Step 2: Post the month's row
Release each prepaid by its own convention, and estimate each accrual from the best evidence on hand: a meter, a contract, last month's bill.
Step 3: Tie the schedule to the ledger
The schedule's remaining balance must equal the account, to the cent. A difference is a missed or doubled row.
Step 4: Set the reversals
Accruals reverse on the first day of the next month, so the real bills can be coded normally.
Step 5: Flag what's gone stale
A prepaid past its service end with a balance left, or an accrual carried three months with no bill, is an exception to chase.
A schedule isn't a calculation done once. It's the evidence for every month's entry, and its balance is the balance sheet's.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 340-10 (opens in a new tab)Other Assets and Deferred Costs — prepaid expensesFree after registration
- ASC 405 (opens in a new tab)LiabilitiesFree after registration
- ASC 250 (opens in a new tab)Accounting Changes and Error CorrectionsFree after registration
- Background reading — not an authority
- Wikipedia, “Accrual” (opens in a new tab)AccrualFree to read
- Wikipedia, “Deferral” (opens in a new tab)DeferralFree to read
- Wikipedia, “Adjusting entries” (opens in a new tab)Adjusting entriesFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Prepaid expenseCash paid before the benefit is consumed — an asset until it is. "Prepayment" is the UK and IFRS word for the same asset; a customer paying us early is a customer advance or deposit, a liability
- Accrued liabilityAn obligation for goods or services received but not yet invoiced or paid — wages, interest, professional fees — recorded by an accrual
- Reversing entryAn entry dated the first day of the next period that exactly offsets a period-end accrual, so the real invoice can be coded normally without double-countingConvention
- True-upThe adjustment that replaces an estimate with the actual amount once it is known
- Roll-forwardOpening → movements → closing, provenConvention
- Tie-outProving a GL balance against supporting evidence
- Straight-lineAllocating an amount evenly across the periods it covers — cost less salvage value divided by useful life for depreciation; equal monthly amounts for a prepaid or a ratable subscription. One systematic and rational method among several
- DeferralCash paid or received ahead of the expense or revenue it relates to, held on the balance sheet — as a prepaid or deferred revenue — until consumed or earned
- AccrualAn expense incurred, or revenue earned, before it is invoiced — recorded at period end so it lands in the right period
- EvidenceDocumentation supporting a recorded amount
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Schedules, accruals & roll-forwardsEvery balance sheet account needs a schedule behind it, and the schedule has to tie to the GL. Most accounting products ship a ledger and statements and leave the schedules in spreadsheets. That handoff is where closes break.
- Prepaid & deferred releaseRelease a prepaid or deferred balance evenly or by days in each month.
- Journal entry for prepaid insuranceWhen the premium is paid, debit Prepaid insurance and credit Cash. At each month-end, debit Insurance expense and credit Prepaid insurance for the month's share of the policy, until the prepaid balance reaches zero.
- Journal entry for a prepaid software subscriptionWhen an annual software subscription is paid up front, debit Prepaid software and credit Cash (or Accounts payable). Each month-end, debit Software expense and credit Prepaid software for the days of service used that month.
- Journal entry for prepaid rentWhen rent is paid in advance, debit Prepaid rent and credit Cash. At each month-end, debit Rent expense and credit Prepaid rent for the month the space was used.
- Journal entry for accrued expensesAt month-end, debit the expense and credit Accrued expenses for work received but not yet billed. Reverse the accrual on the first day of the next month, then book the vendor's bill as usual when it arrives.
- Prepaid expense vs accrued expenseA prepaid expense is an asset: the cash went out before the cost was used. An accrued expense is its mirror, a liability for a cost already used but not yet paid or billed.
- Reversal vs reversing entryA reversal is a new entry that cancels a wrong posted entry, and both stay in the ledger. A reversing entry is planned: it undoes a month-end accrual on the first day of the next period so the vendor's bill can be booked normally.
- Accrued expenses vs accounts payableBoth are liabilities for costs already incurred. If the vendor's invoice has arrived and been approved, the cost is in accounts payable. If it hasn't, the month-end estimate is an accrued expense.
- Accrual vs deferralAn accrual recognizes revenue or expense ahead of the cash, which creates receivables and payables. A deferral parks cash that moved early on the balance sheet, as a prepaid or deferred revenue, until it's earned or used.
- Accrued expenses vs accounts payable at month-endAP is a bill you’ve received; an accrued expense is a cost incurred before the bill arrives. When to accrue, and how reversing entries work, by example.
- ScheduleTableOne shell, seven presets. Prepaids through debt.
- RollForwardOpening → movements → closing → tie. The universal shape.
- AdjustingEntryFormTemplated by type. Auto-reverse defaults on for accruals.
- SchedulePreviewWhat the schedules will post, before they post.
- EntryReversalDialogHold-to-confirm. Never a delete.