Three concepts most founders confuse, prepayments, accruals and provisions. They look similar (all are timing adjustments at period-end), but they answer different questions about your books. Understanding the difference makes month-end reports trustworthy.
Prepayments
A prepayment is cash you have already paid for a service or benefit that spans into future periods. The classic example: an annual insurance premium paid upfront. The cash leaves now; the benefit accrues monthly.
Bookkeeping: when you pay, debit prepayment (asset), credit cash. Each month, debit insurance expense, credit prepayment. By year-end the prepayment balance is zero and insurance expense is fully recognised.
Accruals
An accrual is the opposite of a prepayment, an expense that has been incurred but not yet billed or paid. Common accruals: utilities (you have used the service but not received the bill), professional fees for ongoing work, year-end bonuses earned but unpaid.
Bookkeeping at month-end: debit expense, credit accrued liability. Reverse the accrual when the actual bill is received and book the bill normally. The result: expense is recognised in the period it relates to, not when the bill arrives.
Provisions
A provision is a liability of uncertain timing or amount. Examples: warranty obligations (you know some products will fail; you do not know which or when), legal claims (a lawsuit is pending; the outcome is uncertain), restructuring costs already committed.
IFRS requires three tests for a provision: a present obligation arising from a past event, probable outflow of economic benefits, and reliable estimate of the amount. If any test fails, do not provision, disclose as a contingent liability instead.
How they appear in the accounts
Prepayments sit on the balance sheet as a current asset. Accruals sit as a current liability. Provisions sit as a current or non-current liability depending on timing. Each generates a corresponding P&L entry, either an expense recognised earlier (accrual, provision) or later (prepayment).
Year-end auditors test these areas heavily because they are where reported profit can be massaged. Document each adjustment with calculation and rationale. Reverse and re-evaluate at the start of each new period, most prepayments roll, most accruals reverse.
This guide is general information, not professional advice. For situations that involve specific facts, talk to your accountant, or hire one of ours from the marketplace.