Accruals vs prepayments: what's the difference?

Accruals and prepayments are two sides of the same coin: both make sure costs and income land in the period they relate to, not just the period the cash moved. They simply point in opposite directions.

Prepayment: paid now, used later

You've already paid for something you'll consume in future periods. The classic example is annual insurance paid up front. The cash is out, but the expense belongs to future months, so you park it on the balance sheet and release it over time.

• Cash: out now
• Expense: recognised later
• Balance sheet: an asset (money's worth still to be consumed)

Accrual: used now, paid later

You've received the benefit but haven't been billed or paid yet. Think of December's electricity — you used it, but the invoice arrives in January. To make December's accounts complete, you accrue the estimated cost now.

• Cash: out later
• Expense: recognised now
• Balance sheet: a liability (money you still owe)

Side by side

Why it matters at month-end

Getting these right is what makes your monthly numbers trustworthy. Miss an accrual and you understate costs; forget to release a prepayment and you overstate them. Reviewers and lenders look closely at both.

Automating both

WorkWithLottie handles accruals and prepayments together: it identifies the relevant lines in Xero, builds the schedules, posts (or queues) the journals, and reverses recurring accruals automatically each period — so nothing slips through the cracks at close.