Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Ledger Accounts and Adjustments for Accruals and Prepayments

Updated 11 October 2026 · Fact-checked

An expense ledger account shows cash paid plus or minus year-end adjustments. Add an accrual (owed, unpaid) and deduct a prepayment (paid for next period). The balancing figure is the charge to profit or loss. Accruals and deferred income are liabilities; prepayments and accrued income are assets.

Understand Ledger Accounts and Adjustments for Accruals/Prepayments

Accounting follows the accruals concept. Income and expenses go into the period they relate to, not the period when cash moves. So the cash paid in a year is often not the expense for that year.

An accrued expense is a cost used up in the period but not yet paid. It is a liability at the year end. A prepaid expense is paid in the period but relates to a later period. It is a current asset. Rent paid in advance is a typical example.

Income works the same way. Accrued income is earned but not yet received, so it is an asset. Deferred income is received but not yet earned, so it is a liability.

In a ledger account, the closing balance is carried down to the next period as balance c/d. It sits on the opposite side to the balance b/d that you bring down below the totals as the opening balance of the next period. The figure left to transfer to the statement of profit or loss is the balancing figure. Think of an expense account as a story: opening balance, cash paid, closing balance, and what is left is the expense.

The same balances appear in the statement of financial position. Accruals and deferred income sit in current liabilities (payables). Prepayments and accrued income sit in current assets (receivables).

Key formulas to remember

Expense charged to profit or loss: Cash paid + closing accrual + opening prepayment − opening accrual − closing prepayment; Use this as a check on your ledger account. It is the balancing figure when the account is written up.
Income recognised in profit or loss: Cash received + closing accrued income + opening deferred income − opening accrued income − closing deferred income; Mirror image of the expense formula.
Expense account: closing balance side: Accrual: balance c/d on the debit side, balance b/d brought down on the credit side (closing credit balance). Prepayment: balance c/d on the credit side, balance b/d brought down on the debit side (closing debit balance).; Balance c/d is always on the opposite side to the balance b/d brought down. An accrual is a credit balance, so c/d is on the debit side and b/d is on the credit side. A prepayment is a debit balance, so c/d is on the credit side and b/d is on the debit side.
Journal for an accrued expense: Dr Expense; Cr Accruals (payables); Reverses by opening balances in the next period.
Journal for a prepayment: Dr Prepayments (receivables); Cr Expense; The expense falls and an asset is created.
Journal for accrued income: Dr Accrued income (receivables); Cr Income; Income rises because it is earned but not yet received.
Journal for deferred income: Dr Income; Cr Deferred income (liabilities); Income falls because part is not yet earned.

How to solve Ledger Accounts and Adjustments for Accruals/Prepayments questions

Use this routine for any ledger account question on accruals, prepayments, accrued income or deferred income.

1Read the question and identify the year-end date and the period each payment or receipt covers.
2Work out the closing adjustment. Take the cost for the whole period, then split it into the part used up and the part that belongs to the future or is unpaid.
3Draw the ledger account. Put the opening balance on the correct side: an opening accrual is a credit, an opening prepayment is a debit.
4Enter the cash paid (debit side for expenses) or cash received (credit side for income).
5Enter the closing balance as balance c/d on the side opposite to the balance b/d you will bring down. For an expense accrual, c/d is on the debit side and b/d is brought down on the credit side. For a prepayment, c/d is on the credit side and b/d is brought down on the debit side.
6Insert the balancing figure as the transfer to the statement of profit or loss, then total both sides and check they agree.
7Bring the balance down on the opposite side to the balance c/d, below the totals, ready for the next period.
8Show the closing balances in the statement of financial position: prepayments and accrued income as assets, accruals and deferred income as liabilities.

Quickest way: Quick formula check for objective tests

When to use it: Use this when the question asks only for the profit or loss charge or the statement of financial position figure, with no need to draw the account.

Start with the cash paid or received for the year.
Adjust for the opening balances: add an opening prepayment, deduct an opening accrual (for expenses).
Adjust for the closing balances: add a closing accrual, deduct a closing prepayment (for expenses).
For income, do the reverse: add closing accrued income and opening deferred income, deduct opening accrued income and closing deferred income.
Check your answer is reasonable. A closing accrual should make the expense higher than cash paid, if there is no opening balance.

Common mistakes in Ledger Accounts and Adjustments for Accruals/Prepayments

Adding a prepayment to the expense instead of deducting it.
Students see it as a cost that was paid, so they think it should increase the expense.
Fix: A prepayment relates to a future period, so it reduces this year's expense. Ask: has this cost been used up yet?
Ignoring the opening balance from the prior year.
The question gives it as a small note, or students assume the year starts at zero.
Fix: Always check for opening accruals and prepayments. An opening accrual reduces this year's expense because last year's charge already covered part of the cash paid.
Placing the balance c/d on the wrong side of the account.
Students learn the rule by memory and mix up debit and credit.
Fix: Balance c/d goes on the opposite side to the balance b/d you bring down. An expense accrual is a credit balance, so c/d is on the debit side and b/d is on the credit side. A prepayment is a debit balance, so c/d is on the credit side and b/d is on the debit side. Check that the account balances.
Calculating the prepayment for the wrong number of months.
Students count the months from the payment date, not from the year end.
Fix: Count the months after the year end that the payment covers. A payment covering months up to the next year end date, for example, needs a clear timeline.
Treating deferred income as an asset.
Cash has been received, so it feels like something owned.
Fix: Deferred income is a liability because you still owe the service. It is shown in current liabilities.
Showing the accrual as a deduction from cash at bank.
Students confuse unpaid amounts with payments made.
Fix: An accrual has no cash movement yet. It is a payable, shown with other current liabilities.

Worked examples

Example 1

A business has a year end of 31 December 20X5. Rent paid during the year was $18,000. At 1 January 20X5, rent of $1,500 had been prepaid. At 31 December 20X5, rent of $2,000 was prepaid. Prepare the rent expense account and state the charge to profit or loss.

Show the solution

Opening prepayment of $1,500 is a debit balance, so enter it on the debit side as balance b/d.
Cash paid of $18,000 goes on the debit side.
The debit side totals $19,500.
The closing prepayment of $2,000 is carried down as balance c/d on the credit side.
The balancing figure transferred to profit or loss is $19,500 − $2,000 = $17,500. This is also entered on the credit side.
The credit side is the $17,500 transfer to profit or loss plus the $2,000 balance c/d, which totals $19,500. This agrees with the debit side.
Check: 18,000 + 1,500 opening prepayment − 2,000 closing prepayment = 17,500.
Balance b/d of $2,000 is brought down on the debit side and shown as a current asset.

Answer: The rent expense for the year is $17,500. A prepayment of $2,000 appears in current assets.

Example 2

A business has a year end of 30 June 20X6. Interest income received in the year was $7,200. At 1 July 20X5, accrued interest income of $900 was owed to the business. At 30 June 20X6, accrued interest income was $1,300. Prepare the interest income account and state the income for the year and the asset at the year end.

Show the solution

The opening accrued income of $900 is a debit balance, so enter it on the debit side as balance b/d.
Cash received of $7,200 is entered on the credit side.
The closing accrued income of $1,300 is carried down as balance c/d on the credit side.
The balancing figure is the transfer to profit or loss, entered on the debit side. Income = 7,200 + 1,300 − 900 = 7,600.
The income transferred to profit or loss is a debit in this account, and receipts are credits. Debit side: balance b/d 900 + transfer to profit or loss 7,600 = 8,500. Credit side: cash received 7,200 + balance c/d 1,300 = 8,500. The account balances.
Balance b/d of $1,300 is brought down on the debit side and shown in current assets.

Answer: Interest income for the year is $7,600. Accrued income of $1,300 is a current asset.

Exam tips

In objective tests, check whether the question asks for the expense, the cash paid or the balance sheet figure. The wrong choice is often one of the distractors.
Work out the timeline first. Write the months covered by each payment next to the year end, then calculate.
For multiple response questions, remember that accruals and deferred income are liabilities, and prepayments and accrued income are assets.
Trial balance adjustments are usually given as notes. A prepayment reduces the expense and appears as a new asset, so each note affects two places.
Use the formula as a quick check on your ledger account, then move on.

Practice questions from Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Ledger Accounts and Adjustments for Accruals/Prepayments: frequently asked questions

How do I write up an expense account with an accrual?

Enter the cash paid on the debit side. Enter the closing accrual as balance c/d on the debit side too, so the debit side shows the full expense. Put the balancing figure on the credit side as the transfer to profit or loss. Bring the accrual down as balance b/d on the credit side below the totals.

Where do accruals and prepayments appear in the financial statements?

The expense or income adjusted for them appears in the statement of profit or loss. Accruals and deferred income appear in current liabilities. Prepayments and accrued income appear in current assets.

Do I add or subtract an opening accrual?

You subtract it from the cash paid when finding the expense. Last year's charge already included that amount, so this year's cash payment partly settles last year's cost.

Is deferred income the same as an accrual?

No. An accrual is an expense incurred but not yet paid. Deferred income is cash received before the income has been earned. Both are liabilities, but they relate to different things.

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