Financial Accounting · General ledger accounts and journal entries

Accruals, Prepayments and Ledger Adjustments Explained for ACCA

Updated 11 October 2026 · Fact-checked

An accrual is an expense (or income) earned in the period but not yet paid (or received). A prepayment is paid in advance for a later period. In the ledger, you take the cash paid, adjust for opening and closing balances, and the balancing figure is the profit or loss charge.

Understand Accruals, Prepayments and Ledger Adjustments

Accounting follows the accruals concept. You record income and expenses when they are earned or incurred, not when cash moves. So the expense for a year must cover only that year's use, however much cash was paid.

An accrual is an expense used but not yet paid at the year end. Example: electricity used in December but billed in January. You add it to the expense and show a current liability. Accrued income is the mirror image: income earned but not yet received. It is a current asset.

A prepayment is an expense paid but relating to a future period. Example: insurance paid for next year. You remove it from this year's expense and show a current asset. Deferred income is income received in advance. It is removed from this year's income and shown as a current liability.

The same logic applies to receivables. An irrecoverable debt is a debt you will not collect. You write it off as an expense and remove the receivable. An allowance for receivables is an estimate of debts that may not be collected. It is a credit balance that reduces receivables, and only the change in the allowance goes to profit or loss.

In the exam, you are usually given opening balances, cash paid and closing balances. You build the expense account and find the missing figure.

Key formulas to remember

Expense charge to profit or loss: Cash paid + closing accrual + opening prepayment − opening accrual − closing prepayment; Use this to find the P&L charge directly. Accruals at the end add to cost, prepayments at the end reduce it.
Income recognised: Cash received + closing accrued income + opening deferred income − opening accrued income − closing deferred income; Mirror of the expense rule. Check which side each balance sits on.
Accrual journal: Dr Expense; Cr Accruals (liability); Reverse the logic for accrued income: Dr Accrued income (asset); Cr Income.
Prepayment journal: Dr Prepayments (asset); Cr Expense; For deferred income: Dr Income; Cr Deferred income (liability).
Irrecoverable debt write-off: Dr Irrecoverable debts expense; Cr Receivables; Debt recovered after write-off: Dr Bank; Cr Irrecoverable debts expense (or recovered account).
Allowance for receivables: Required allowance = receivables (after write-offs) × allowance %; charge = required allowance − existing allowance; An increase is Dr Expense, Cr Allowance. A decrease is Dr Allowance, Cr Expense. Never apply the percentage before deducting write-offs.

How to solve Accruals, Prepayments and Ledger Adjustments questions

Use this method for any ledger adjustment question, whether it asks for the P&L charge, a journal or the statement of financial position balance.

1Read the question and note which account you need: expense, income or receivables.
2Identify each balance given and whether it is opening or closing, and an accrual or a prepayment.
3Set up a T account. Put opening prepayment on the debit side and opening accrual on the credit side.
4Enter the cash paid or received for the year on the correct side.
5Enter the closing balances on the opposite side from their opening position: closing accrual on the debit side, closing prepayment on the credit side.
6The balancing figure is the charge to profit or loss. Check it makes sense against the formula.
7For receivables, deduct irrecoverable debts first, then calculate the required allowance, then post only the change.
8Write the journal or answer in the format the question asks for, using the right debit and credit.

Quickest way: Adjust the cash figure

When to use it: Use this for number entry or multiple choice questions that ask only for the P&L charge and give cash paid and balances.

Start with cash paid for the year.
Add the closing accrual. Subtract the opening accrual.
Subtract the closing prepayment. Add the opening prepayment.
Sense check: if the closing accrual is higher than the opening one, the charge must be higher than the cash paid.
For allowances, find the closing figure first, then subtract the old allowance to get the charge.

Common mistakes in Accruals, Prepayments and Ledger Adjustments

Adding a closing prepayment to the expense instead of deducting it.
Students see an asset and think it increases the account.
Fix: A prepayment is a cost of a future period, so it reduces this year's expense. Ask whether the cost relates to this year.
Ignoring the opening accrual or prepayment.
Students only adjust for the closing balances.
Fix: Opening balances are reversed into this year's expense. Always put them in the T account first.
Applying the allowance percentage to receivables before deducting irrecoverable debts.
Students follow the order of the notes in the question.
Fix: Write off the bad debts first, then calculate the allowance on the remaining balance.
Charging the whole allowance to profit or loss instead of the change.
Students forget there is already an allowance in the opening balances.
Fix: Compare the required allowance with the existing one and post only the difference.
Showing an accrual as an asset or a prepayment as a liability.
Students mix up which side the balance carries forward on.
Fix: Remember: accruals are owed (liability), prepayments are owned (asset). The same applies to accrued and deferred income in reverse.
Treating an allowance increase as a credit to profit or loss.
Students confuse the credit to the allowance account with the P&L entry.
Fix: An increase in the allowance is an expense, so debit profit or loss. The credit goes to the allowance.

Worked examples

Example 1

A business has an opening accrual for rent of $1,200 and an opening prepayment for insurance of $500. During the year it pays rent of $14,400 and insurance of $3,000. At the year end, rent of $1,500 is accrued and insurance of $700 is prepaid. Calculate the profit or loss charge for rent and for insurance.

Show the solution

Rent: start with cash paid of $14,400.
Subtract the opening accrual of $1,200: 14,400 − 1,200 = 13,200.
Add the closing accrual of $1,500: 13,200 + 1,500 = 14,700.
Insurance: start with cash paid of $3,000.
Add the opening prepayment of $500: 3,000 + 500 = 3,500.
Subtract the closing prepayment of $700: 3,500 − 700 = 2,800.

Answer: Rent expense is $14,700 and insurance expense is $2,800.

Example 2

At the year end, receivables are $60,000 before writing off an irrecoverable debt of $2,000. The existing allowance for receivables is $1,500. The business wants an allowance of 5% of net receivables. Show the entries and the effect on profit or loss.

Show the solution

Write off the debt: Dr Irrecoverable debts expense $2,000; Cr Receivables $2,000.
Receivables after the write-off: 60,000 − 2,000 = $58,000.
Required allowance: 58,000 × 5% = $2,900.
Increase in allowance: 2,900 − 1,500 = $1,400.
Journal: Dr Allowance for receivables expense $1,400; Cr Allowance for receivables $1,400.
Total charge to profit or loss: 2,000 + 1,400 = $3,400.
Statement of financial position: receivables 58,000 less allowance 2,900 = $55,100.

Answer: The total charge is $3,400 and net receivables in the statement of financial position are $55,100.

Exam tips

Check carefully whether each balance is opening or closing, and whether it is an accrual or prepayment. This is where most marks are lost.
In multiple choice, work out the answer yourself first and then match it. Wrong options are often built from the common sign errors.
For number entry, type only the number asked for, with no symbols or commas unless the question says so.
In multiple response questions, select exactly the stated number of options and test each journal for a correct debit and credit.
Before you answer, ask whether the figure should be larger or smaller than the cash paid. This catches most mistakes.

Practice questions from General ledger accounts and journal entries

Accruals, Prepayments and Ledger Adjustments: frequently asked questions

What is the difference between an accrual and a prepayment?

An accrual is an expense incurred but not yet paid at the year end, so it is a liability. A prepayment is paid in advance for a future period, so it is an asset. Accruals increase this year's expense and prepayments reduce it.

How do I record a prepaid expense in the ledger?

Debit the prepayments account and credit the expense account with the amount relating to the next period. The expense account then shows only the cost of the current year. The prepayment is carried forward as a current asset and reversed at the start of next year.

What is the journal entry for an irrecoverable debt?

Debit the irrecoverable debts expense account and credit receivables. This removes the debt from the receivables ledger and charges the loss to profit or loss. If the customer later pays, you reverse it with Dr Bank and Cr Irrecoverable debts expense.

Does the whole allowance for receivables go to profit or loss?

No. Only the change in the allowance is charged. If the required allowance is higher than the existing one, you debit expense for the increase. If it is lower, you credit expense for the decrease.