A prepayment is a payment which you have made which relates to an accounting period later than the one in which you are working. For example, if your year end is 30 th April and you paid your quarterly rent on the 25 th March then only 5 weeks rent should be taken into account for the year ended 30 th April. The rent is for the 13 weeks to 24 th June so 8/13 th of the amount paid is a prepayment i.e. it relates to a period after 30 th April.

Other common examples of prepayments are insurance, maintenance contracts and business rates.

An accrual is an expense which you have incurred in the accounting period but the invoice for the expense is dated after the period. For example, at the 30 th April you may have used electricity which will not get invoiced until June. In order for the accounts for the year ended 30 th April to show an accurate charge for electricity it will be necessary to accrue an estimate of the cost covering the period from the last invoice received until 30 th April.

Other common examples of accruals are telephone, travel expenses and accountancy costs relating to the period.

How to record prepayments and accruals in Sage

Annual Accounting

The easiest way is to enter prepayments and accrual by journal entry.

So to enter a rent prepayment you debit the prepayments account (Account 1103) and credit the rent account (Account 7100).

To enter an accrual you debit the relevant expense account and credit the accruals account (Account 2019).

Monthly/Quarterly Accounting

If you prepare monthly or quarterly accounts then you may want to use the Prepayments and Accruals facility within Line 50 (Accountant Plus and Financial Controller only). This facility automates some of the work involved in putting through these journal entries and then reversing them in the following period. See Sage Help for details.