ACCA Accruals, Prepayments, Accrued and Deferred Income Notes by PW

Accrual accounting is concerned with the timing of recognising transactions. Income is recognised when it is earned and expenses when they are incurred, rather than only when cash is received or paid. Accruals, prepayments, accrued income and deferred income arise when the timing of the transaction differs from the related cash flow.

To support systematic ACCA preparation, PW helps you build your Financial Accounting concepts through structured learning, revision resources and topic-wise preparation. Regularly practising journal entries and period-end adjustments can help you identify whether an amount belongs to the current accounting period or a future period.

Accrual and Matching Concepts

Accrual accounting requires income and expenses relating to an accounting period to be recognised in that period, regardless of when the related cash is received or paid.

The matching concept works with accrual accounting by requiring expenses incurred in generating revenue to be recognised in the same accounting period as the related revenue. This helps ensure that the profit or loss for the period includes the relevant income and expenses.

For example, a business may use electricity throughout the year but receive an invoice from the supplier after the year-end. The electricity used before the year-end is an expense of the current accounting period, even if the invoice has not yet been received.

What Is an Accrual?

An accrual is recognised when an expense has been incurred but has not been paid or invoiced by the end of the financial period.

For example, electricity may have been consumed during December, but the supplier may issue the invoice in January. The December electricity expense still needs to be recognised in the year ending in December.

The year-end journal entry is:

Debit: Expense
Credit: Accruals

The expense increases because the business has incurred the cost. The accrual is recognised as a liability because the amount is still owed.

Accounting for Accruals

At the end of the accounting period, an adjustment is made for expenses incurred before the invoice is received or payment is made.

An increase in expense reduces profit for the period. The increase in the accrual liability also reduces the business's net assets.

In the following accounting period, the accrual may be reversed when the actual invoice is received and the expense is paid.

Example of an Accrual

Suppose a business receives electricity invoices totalling $21,880 for electricity used from January to October. At 31 December, electricity for November and December has been used but has not yet been invoiced.

The latest invoice is $7,230 for three months.

Average monthly electricity cost = $7,230 ÷ 3 = $2,410

For two months:

Accrual = $2,410 × 2 = $4,820

The year-end adjustment is:

Debit: Electricity Expense $4,820
Credit: Accruals $4,820

The $4,820 accrual ensures that the expense recognised for the year includes the electricity consumed during November and December.

What Is a Prepayment?

A prepayment occurs when an expense is paid or invoiced before the related goods or services are received.

For example, a business may pay an insurance premium before the period of insurance cover begins. The portion relating to a future accounting period is treated as a prepayment.

A prepayment is recognised as an asset because the business has paid for a future benefit.

Accounting for Prepayments

The portion of an expense relating to a future period is removed from the current period's expense and recognised as a prepayment.

The adjustment is:

Debit: Prepayments
Credit: Expense

The current-period expense is therefore reduced, while the amount relating to the future period remains recognised as an asset.

Accrued and Deferred Income

The same timing principle applies to income.

Accrued income is income that has been earned but has not yet been received or invoiced.

Deferred income is income that has been received or invoiced before it has been earned.

Accounting for Accrued Income

Suppose a business earns rental income during July but will receive the payment after the year-end. The income relates to July and should be recognised in the July accounting period.

The adjustment is:

Debit: Accrued Income
Credit: Income

Accrued income is shown as an asset because the business has earned the income and is entitled to receive it.

Accounting for Deferred Income

Deferred income arises when payment is received before the related goods or services are provided.

For example, a business may receive rental income in advance for the following month. The amount relating to the future period should not be recognised as current-period income.

The adjustment is:

Debit: Income
Credit: Deferred Income

Deferred income is shown as a liability because the business has received the amount but has not yet earned the related income.

Accruals, Prepayments, Accrued and Deferred Income ACCA PDF Download

The Accruals, Prepayments, Accrued and Deferred Income ACCA PDF provides a focused revision resource for understanding period-end adjustments. It covers the accrual and matching concepts, accruals, prepayments, accrued income, deferred income, accounting entries and practical examples.

Use the PDF to revise the key concepts and journal entries before practising ACCA Financial Accounting questions.

Why Choose the Accruals, Prepayments, Accrued and Deferred Income ACCA PDF by PW?

The PDF can help you revise the four major period-end adjustments in one place. You can also connect the topic with related ACCA Financial Accounting concepts and revision resources.

1. Revise Accruals and Prepayments With ACCA Accruals and Prepayments Revision

Strengthen your understanding of accruals, prepayments, matching, journal entries, balance sheet treatment and their effect on profit with PW's ACCA Accruals and Prepayments Revision resource.

2. Build Your Financial Accounting Foundation With ACCA Financial Accounting (FA) Complete Guide

Revise double-entry bookkeeping, financial statements, accounting concepts and other core areas through PW's ACCA Financial Accounting (FA) Complete Guide.

3. Connect the Topic With ACCA FA Syllabus 2026

Review the Financial Accounting syllabus and connect accruals, prepaid expenses, accrued income and deferred income with the wider ACCA FA syllabus.

4. Strengthen Core Concepts With ACCA FA Accounting Concepts

Revise accrual accounting and other fundamental accounting principles before attempting questions based on period-end adjustments.

Accruals, prepayments, accrued income and deferred income help ensure that income and expenses are recognised in the correct accounting period. Understanding their definitions, journal entries, asset or liability treatment and effect on profit can help you prepare accurate financial statements and practise ACCA Financial Accounting questions effectively.

5. Connect Adjustments With Published Financial Statements

Understand how accrued and prepaid expenses are reflected in financial statements and revise their role in period-end adjustments alongside the Accruals, Prepayments, Accrued and Deferred Income ACCA PDF.