Definition
An accrual is a cost that belongs to a company’s financial year but has not been invoiced or paid by the year end, such as the accountant’s fee for preparing that year’s accounts. It is recorded as a cost in the profit and loss account and as a liability on the balance sheet, so each year carries its own expenses. Prepayments work the other way round.
Accruals and prepayments
A prepayment is a cost paid before the year end for the following period, held as an asset until then. Company accounts must be prepared on this accruals basis.
Example
ABC Plumbing Ltd has a 31 March 2026 year end. Its £1,200 accountancy fee for that year is invoiced in June 2026, so it is accrued at 31 March 2026. The company also paid a £1,200 annual insurance premium on 1 January 2026, and the nine months of cover after the year end (£900) is a prepayment.
Why they matter for tax
Accruals and prepayments change the profit Corporation Tax is based on, so missing them misstates the tax bill. On a micro-entity balance sheet they appear as “accruals and deferred income” and “prepayments and accrued income”. See where they sit among the liabilities on a micro-entity balance sheet.
SmartFiling’s bookkeeping service keeps records current, which makes year-end adjustments easier.
Related questions
- What do I need to give my accountant for year-end accounts? Bank statements, sales and purchase records, and any bills received after the year end that relate to it.
- Do sole traders use accruals? Many sole traders can use the cash basis instead, but limited companies cannot.
Related terms
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Balance sheet
A balance sheet is a snapshot of a company's finances on the last day of its financial year.
Read definition -
Profit and loss account
The profit and loss account (P&L, also called the income statement) shows a company's income, costs and resulting profit or loss for its financial year…
Read definition -
Bookkeeping
Bookkeeping is the day-to-day recording of a business's financial transactions, such as sales, purchases, receipts, payments and bank movements…
Read definition
