Free tool
Accrual and deferral calculator
Work out the monthly amounts to accrue or defer. The journal entry generator builds the journal.
Why it matters
Without accruals and deferrals your profit moves with invoice timing, not with the work done. A large annual insurance bill hits one month hard. A delivery with no invoice yet is missing from costs.
Matching costs to the month they belong to makes your monthly reports comparable.
The steps
- List what is missing. Look for goods received, work done and services used with no bill yet. Ask the team for a list at cut-off.
- Work out the accrual. Use the order, the delivery docket or the agreed price. Leave GST out until you hold a tax invoice.
- Post the accrual. Debit the expense and credit an accrued expenses liability. Date it the last day of the month.
- Reverse it. Set the journal to reverse on the first day of next month. When the bill arrives it replaces the accrual.
- List payments that cover more than one month. Annual insurance, software subscriptions and rent paid in advance are common.
- Post the prepayment. Debit a prepayments asset account. Credit the bank or payable.
- Release it monthly. Each month debit expense and credit prepayments for one month's share. Check the balance runs to zero at the end of the cover.
- Check the balances. At month end, list accruals and prepayments with the supporting document for each.
Worked example
Example Distribution Pty Ltd has two items at 31 October.
| Item | Journal | Amount |
|---|---|---|
| Pipe delivered 29 October, no invoice (accrual) | Debit purchases, credit accrued expenses | A$4,000.00 |
| Insurance paid 1 October for 12 months (deferral) | Debit prepayments, credit bank | A$12,000.00 |
| October share of insurance | Debit insurance expense, credit prepayments (12,000 / 12) | A$1,000.00 |
| Prepayment left at 31 October | 12,000 - 1,000 | A$11,000.00 |
October costs include A$4,000 for the pipe and A$1,000 for insurance. The accrual reverses on 1 November. The prepayment falls by A$1,000 each month.
Common mistakes
- Forgetting to reverse the accrual, so cost counts twice.
- Accruing GST before you hold a tax invoice.
- Expensing a 12-month payment in one month.
- Having no support for accrual amounts.
Next step
Use the Accrual and deferral calculator first. Then see how to close the month in AP.
Common questions
Do I need accruals for small amounts?
Set a limit, such as A$500. Ignore items below it.
What is the difference between a prepayment and an accrual?
A prepayment is paid before the cost is used. An accrual is used before it is billed.
Do accruals matter if I use cash accounting?
Accruals are for accrual-based reports. Check your reporting needs with your accountant.
Related how-to guides
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