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.
Accrued expenses
Subcontractor finished $1,400 of work on 29 March. Invoice arrives 4 April. 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 1 April 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 1 March 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 AR (or Accrued income), credit revenue. 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.
Reversing journals
Xero manual journals can be marked to reverse on a date. You accrue on 31 March; Xero posts the opposite on 1 April. 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 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.
Choose an answer, then check.
Prepaid insurance $6,000 for a year. March expense is:
Practice: Consume the prepayment, Which month’s revenue?