Accruals and Prepayments — Getting Your Year-End Right (2026)

The Matching Concept — Recording Costs in the Right Year

Traditional accounting is built on the matching concept, also called the accruals concept. The rule is straightforward: costs and income are recorded in the period they relate to, not simply when the cash moves. If you used electricity to run your workshop in March, that cost belongs in March's accounts — even if the bill doesn't arrive until April. If a customer pays you a deposit in March for a job you'll start in May, that income belongs in May, not March.

This matters because your profit is meant to be a true and fair picture of how the business actually performed in the year. If you only counted money as it moved in and out, a single large bill paid a week early or a week late could swing your profit — and your tax — in a way that has nothing to do with how the business really did.

The Cash Basis — When You Can Skip Most of This

There's a simpler alternative called the cash basis. Under the cash basis you record income when money comes in and expenses when money goes out — nothing more. No accruals, no prepayments, no matching adjustments. Many smaller sole traders and partnerships can choose the cash basis, and for a lot of trade businesses it's perfectly sensible and a good deal less fiddly.

If you're on the cash basis, you can largely stop reading here — accruals and prepayments are a feature of traditional accounting, and they don't apply to you. Limited companies, however, generally must prepare accounts on the traditional basis under the Companies Act and accounting standards, so if you trade through a limited company this all applies to you. If you're unsure which basis you're on, your accountant or your last set of accounts will tell you.

What Is an Accrual?

An accrual is a cost you've incurred but haven't yet paid or even been invoiced for at the year-end. You've already had the benefit of the goods or service in the year — you just don't have the paperwork yet and haven't handed over the money.

A classic trade example: a subcontractor works on a job for you in the last week of your financial year, but doesn't send their invoice until two weeks later, after your year-end. The work was done in this year, so the cost belongs in this year. Your accountant accrues the cost — adding it to this year's expenses even though no money has moved and no invoice has arrived. The effect is to increase this year's expenses, which gives a truer profit figure. The same applies to a quarter's worth of electricity you've used but not yet been billed for, accountancy fees for preparing the year-end accounts themselves, or a fuel card statement that lands after the cut-off.

What Is a Prepayment?

A prepayment is the mirror image: an amount you've paid in advance that relates to a future period. You've already handed over the cash, but the benefit hasn't all been used up by the year-end — some of it covers months that fall in the next financial year.

The obvious trade example is annual insurance. Say you pay a year's public liability or van insurance in one go, partway through your financial year. The portion of that premium covering months after your year-end hasn't been "used" yet, so it shouldn't all be a cost in the year you paid it. Your accountant carries the future portion forward as a prepayment, so only the part relating to this year hits this year's expenses. The rest sits on the balance sheet and becomes a cost next year. The same treatment applies to tool-hire paid up front, a software or job-management subscription paid annually, or rent on a unit paid a quarter ahead.

The Income Side — Accrued and Deferred Income

Matching works on the income side too, and it's just as relevant for a trade business that takes deposits and runs jobs across a year-end.

• Accrued income is work you've done but not yet invoiced at the year-end. If you completed a job in the last few days of the year but the invoice doesn't go out until afterwards, the income still belongs in this year — so it's accrued and counted now.
• Deferred income is the opposite: money you've received in advance for work you haven't done yet. A deposit taken before the year-end for a job that doesn't start until afterwards isn't really this year's income — so it's deferred and carried forward to the year the work happens.

Concrete Trade Examples

• Quarterly utility bill straddling year-end: your electricity is billed quarterly and the period runs across your year-end date. The part of the quarter falling before year-end has been used but not yet billed — accrue the unbilled portion as a cost in this year.
• Annual public liability insurance paid mid-year: you pay 12 months up front halfway through the year. The unexpired months that fall after your year-end are a prepayment, carried forward so they become a cost in the right year.
• Deposit for a job starting after year-end: a customer pays a deposit in March for a kitchen fit you'll start in May, with a March year-end. That deposit is deferred income — it belongs in next year's accounts, when you actually do the work.

A Worked Example — Annual Insurance

Say your financial year ends on 31 March. On 1 October you pay £1,200 for 12 months of van insurance covering 1 October to 30 September. By your 31 March year-end, six of those months (October to March) have been used — and six months (April to September) still lie ahead in the next financial year.

Half the premium relates to this year and half to next. So £600 is a cost in this year's accounts, and the remaining £600 is carried forward as a prepayment. Without this adjustment, the full £1,200 would have hit this year's profit, understating it by £600 and pushing £600 of cost into the wrong year. With the prepayment, each year carries the six months of insurance it actually used.

Why It Matters and Who Does It

The point of all this is a true and fair profit — and, just as importantly, the right taxable profit. Your tax is calculated on the profit shown in your accounts, so if timing distortions throw the profit out, they throw your tax out too. Accruals and prepayments stop a bill paid a few days early or an invoice raised a few days late from quietly moving profit between years.

In practice these are bookkeeping adjustments your accountant makes at the year-end. They're posted as journals that reverse in the following period, so an accrued cost this year automatically unwinds when the real invoice arrives next year, and a prepayment this year becomes a cost next year. You don't usually need to manage them day to day — but it helps to understand what they are when you see them in your accounts, and to keep good records of deposits taken, subcontractor work done near the year-end, and any annual bills paid in advance so your accountant can get the adjustments right.

Quick Reference: Accruals vs Prepayments vs Accrued vs Deferred Income

A Note Before You Act

This article is general guidance, not advice, and it only applies under traditional (accruals) accounting — if you're a sole trader using the cash basis, accruals and prepayments don't feature in your accounts. Your year-end is the one time of year where these adjustments matter most, so it's worth talking your accountant through any large annual bills, deposits taken in advance, and work done right at the cut-off. Good records make their job quicker and your accounts more accurate.