close · Lesson 1 · 10 min
Accruals, prepayments, reversing journals
If the work or the benefit sits in this month, the books should too — even if the bank does not.
Dotted words have a reminder. Hover on a computer, tap on a phone.
From earlier
- AP
- AR
- control account
- QBO
Accrued expenses
A subcontractor finished $1,400 of work on March 29. The invoice arrives April 4. March still needs the cost: debit Subcontractors, credit Accrued expenses. When the bill is entered in April, debit Accrued expenses (not Subcontractors again) and credit AP — or reverse the accrual on April 1 and enter the bill normally.
| Account | Debit | Credit |
|---|---|---|
| 5100 Subcontractors | $1,400.00 | |
| 2300 Accrued expenses | $1,400.00 | |
| Totals | $1,400.00 | $1,400.00 |
Prepayments
You pay $6,000 on March 1 for 12 months of insurance. That is not a $6,000 March expense. Debit Prepaid expenses $6,000, credit bank. Then each month debit Insurance $500, credit Prepaid $500. After twelve months prepaid is zero.
| Account | Debit | Credit |
|---|---|---|
| 6100 Insurance | $500.00 | |
| 1200 Prepaid expenses | $500.00 | |
| Totals | $500.00 | $500.00 |
Accrued income and deferred revenue
Work done, not yet billed: debit Accrued income (a current asset — not the AR control account), credit revenue. AR is the invoice subledger; an unbilled accrual has no invoice, so putting it in 1100 makes aged receivables disagree with the ledger. When you raise the invoice, debit AR and credit Accrued income (or reverse the accrual on the 1st and invoice normally). Cash received for work not yet done (a 12-month maintenance plan): debit bank, credit Deferred revenue (liability), then release monthly to income. Maintenance contracts sold in December for the next calendar year are a classic deferred-revenue item.
| Account | Debit | Credit |
|---|---|---|
| 1150 Accrued income | $900.00 | |
| 4000 Landscape services | $900.00 | |
| Totals | $900.00 | $900.00 |
Reversing journals
Xero manual journals can be marked to reverse on a date. You accrue on March 31; Xero posts the opposite on April 1. Then the real bill in April hits expense as usual, netting to the right month. If you forget the reverse and also enter the bill to expense, you double-count the cost across March and April combined. QBO has reversing journals too — same trap.
Check
Choices shuffle each visit. Misses send you back to the section. Look back clears the quiz so you can try again. Practice drills deal a new problem on try-again.
Choose an answer, then check.
This try
Prepaid insurance $6,000 for a year. March expense is:
Practice this
Stay in the flow — open a drill without backing out to the list.