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Accruals and prepayments

Do you use cash accounting or accruals accounting? Lots of the bookkeeping we do for Cornish businesses involves a good mix of both.

You can use cash based accounting if you meet the following criteria:

You run a self employed business

Your business turnover is less then £150,000 a year

Ltd companies can not use cash based

There is a handy page on HMRC which will let you know who qualifies here.

If you can't use cash accounting or don't want to you, the other type of accounting is called accruals accounting or traditional accounting. This method matches transaction to when they occurred not when they are paid or money has been received. Accruals and prepayments are used for management accounts and for year end to show a true reflection of what is happening in the business. So what are they?

Accrued expenses

This is an expense that is still owed at the end of the year. For example there has been building work carried out but it hasn't been invoiced or for monthly management accounts you receive your electricity bill for the quarter but you want to record the expense each month.

Accrued income

This is income that has been earnt in the period but a sales invoice has not been raised or it has been raised but not paid.

Prepaid expense

Classed as an asset, as the business has paid for something that hasn't been received. These are expenses that have been prepaid, an example of a prepayment is commonly rent.

Prepaid income

Classed as a liability as the business has not earnt the value of amount received. If you rent a house out and receive rent in January, but it relates to Jan, Feb and March - 2 months of this will be classed as a prepayment.

Accruals based? Timing is everything

The information featured in this article is for guidance only, no liability is accepted for the opinions it contains.


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