Accruals and prepayments are where the month-end close makes the numbers true to the period rather than to the cash. They’re also where double-counting creeps in if prior-period entries aren’t handled. Here’s the clear version.
Phase 3 of the free month-end close checklist covers this step by step.
The simple distinction
- An accrual recognises something that has happened but hasn’t been invoiced yet — a cost you’ve incurred, or revenue you’ve earned, before the paperwork catches up.
- A prepayment spreads something you’ve already paid for across the periods it actually covers — insurance, subscriptions, rent paid in advance.
One pulls a future item into this period; the other pushes a paid item across future periods. Both exist so the accounts reflect the economic reality of the month, not just the bank movements.
The step most checklists miss: reversals
Posting this period’s accruals is the easy part. The part that causes errors is the prior period. Before you post anything new, confirm last period’s accruals have reversed or been actualised — otherwise you double-count. As a decision: did last period have accruals? → have they reversed/actualised? → if not, reverse before proceeding.
And where an estimate is above materiality — a large accrual based on judgement — document the basis for the reviewer. That’s what makes it defensible later.
Branching on basis
Not every client runs this phase. A cash-basis sole trader may skip large parts of it. That’s why scope is set in Phase 1 — it determines whether accruals and prepayments even apply. The Month-End Close System handles this as a scope branch, and the PathPilot workflow routes each client down the right path automatically.
See the full sequence in the month-end close process guide.