Prepayments and accruals

Summary

Spread income and expenses over months for improved cash flow and realistic profit overview in Sage Accounting.

Resolution

What you need to know

Recording lump-sum invoices or payments for multiple months in one month can distort monthly profits.

Rather than record it as a lump sum, use journals to spread the cost over the number of months the invoice or payment covers. This will give you a realistic picture of your monthly profits and how your business is performing.

Prepayments

Prepayment: paying invoice for multiple periods in advance, showing as monthly expenses on profit and loss.

For example, you pay your rent in January to cover the next six months (January to June). Instead of recording a single lump sum in January, you spread the cost across each month.

Accruals

Accrual happens when billed for something at quarter-end, spreading the cost across each month for accurate accounting.

For example, you receive an invoice for electricity usage in March for the period January to March. Instead of recording the whole value of the invoice in March, you estimate the cost and record a journal each month. Adjust the final amount upon receiving actual payment for accurate accounting.

Record a prepayment

These steps only apply if you make a lump sum payment and want to spread the cost. For installment payments, record payments normally as and when made.

To record a prepayment, you need to:

Record the original transaction – Enter a Purchase invoice or Other Payment. The steps below assume you’ve already done this.
Reverse the effect of the purchase invoice or other payment – Use journals to nullify posted transaction. This moves the value from your profit and loss to the prepayments balance sheet nominal ledger account.
Post the monthly prepayment journals – Transfer values from the prepayments ledger account to the relevant expense ledger account. You need to repeat this for each month affected by the prepayment.

Reverse the original purchase invoice or other payment

An example is that you make a £600 payment for rent in January to your rent nominal ledger account, 7100. This payment covers three months and you want to spread the cost to show £200 for each month on your profit and loss.

From Adjustments, choose Journals, then New Journal.

Enter the following information:

Reference *	Enter a reference, for example, Rent prepayment.
Date *	Enter the date you want to use for the journal. Use the same date as the original transaction.
Description	If required, enter a description for the journal.

Enter the relevant information to reverse the original transaction, for example:
Ledger Account* Details Debit Credit Include on VAT Return?
Prepayments (1120) Rent prepayment reversal 600
Leave clear
Rent and rates (7100) Rent prepayment reversal
600 Leave clear
Click Save.

You've successfully reversed the effect of the payment or purchase invoice. The balance now will reflect on your prepayment nominal ledger account on your balance sheet. To transfer the monthly value back to your profit and loss, record the first monthly prepayment journal now.

Enter the monthly prepayment journal

From Adjustments, choose Journals, then New Journal.
Enter the following information:
Reference * Enter a reference, for example, Monthly rent prepayment.
Date * Use the month's last day as the date for the monthly prepayment.
Description If required, enter a description of the journal.
Enter the relevant information to record the monthly prepayment, for example:
Ledger Account* Details Debit Credit Include on VAT Return?
Rent and rates (7100) Monthly rent prepayment 200
Leave clear
Prepayments (1120) Rent prepayment reversal
200 Leave clear
Click Save.

You’ve now recorded the monthly prepayment. This reduces the balance on your prepayment nominal ledger accounts and posts one month’s value to your profit and loss. You need to repeat these steps for each month the original transaction covers. In this example, you can post these journals for January, February and March.

Record an accrual

To record an accrual, you need to:

Post the monthly accrual journal – Charging a profit and loss nominal ledger account for each month affected by the accrual. The charge also posts to the accruals balance sheet nominal ledger account.
Post a journal to reverse the accrual – The balance on your accruals nominal ledger account increases monthly until it needs reversing in the final month. The reversal clears the value from the accrual nominal ledger account. In the final month's profit and loss, the relevant nominal ledger account balance appears as a credit. This correction occurs when you record the purchase invoice or other payment.
Record the purchase invoice or other payment – When receiving the actual invoice or making the payment. This changes the final month's credit balance to a debit, reflecting any differences.

Enter the monthly accrual journal

In the following steps, we’ll use the example that you pay for your electricity every three months in arrears. The average charge is £300, which you want to record as £100 a month.

From Adjustments, choose Journals, then New Journal.
Enter the following information:
Ledger Account* Details Debit Credit Include on VAT Return?
Gas and electric (7200) January electricity bill 100
Leave clear
Accruals (2110) January electricity bill
100 Leave clear

Enter the relevant information to record the monthly accrual, for example:

Reference *	Enter a reference, for example, Electricity accrual.
Date *	Enter the date you want to use for the journal, for example, the last day of the month.
Description	If required, enter a description for the journal.

Click Save.

You’ve successfully posted the first monthly accrual. You need to repeat this for each month the final invoice or payment covers. Monthly journals debit the gas and electric nominal ledger account (7200), affecting the profit and loss. The credit value posts to the accruals nominal ledger account and this appears on your balance sheet as the accrual is a current liability. At the end of the accrual period, you need to reverse the effect of these postings from your accounts.

Reverse the accrual postings

From Adjustments, choose Journals, then New Journal.