Adjust expenses for accruals and prepayments
Match expense to the period that used the service and record unpaid and prepaid amounts in the correct accounts.
Cambridge IGCSE Accounting 0452 / (9–1) 0985, 2027–2029 Version 1. These lessons follow the 2027–2029 syllabus only; the separate 2026 syllabus update is not yet mapped. Written practice is self-checked, not an official Cambridge grade. Full timed-paper practice and human subject-teacher review remain pending.
Before you begin
- No previous accounting study is assumed. Keep the business, transaction and accounting period in view, and distinguish a resource, a claim and a performance result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
An expense paid in advance for next year is normally recorded at this year-end as what?
What you will learn
- Explain the importance of matching costs and revenues
- Adjust accrued and prepaid expenses
- Prepare the related journal entries and ledger accounts
Recognise expense in the period incurred
An accrued expense is incurred but unpaid at the period end. Add it to the period's expense and recognise a current liability. A prepaid expense is paid before the period uses the service; subtract the unused part from expense and recognise a current asset.
The matching/accruals concept aims to match costs with the period's related activity, not the date cash moves. Keep the accounting period explicit when allocating a bill across time.
Use the adjustment entry and balance the ledger
For an accrual, debit the relevant expense and credit the accrued expense liability. For a prepayment, debit the prepayment asset and credit the expense for the unused amount.
In the expense ledger, include the accrual on the debit side and the prepayment on the credit side before transferring the adjusted expense to the statement of profit or loss. The accrued amount carries forward as a liability; the prepaid amount carries forward as an asset.
These entries update the period's profit and the statement of financial position. The cash book remains based on actual receipts and payments; the adjustment records the timing difference.
Pause and explain
Heating expense paid is $1,750 and a $250 bill is unpaid at year-end. What is the period's expense?
Worked example
Rent paid during the year is $4,800, including $600 for the next period. Calculate this year's expense and give the adjustment and closing ledger balance.
Show the worked solution
- The $600 prepaid amount relates to the next period.
- Expense for this year = 4,800 − 600 = $4,200. In the Rent expense account, debit cash $4,800, credit prepaid rent $600 and transfer $4,200 to the statement of profit or loss.
- Adjustment: Dr Prepaid rent $600; Cr Rent expense $600. Prepaid rent carries forward as a $600 current asset.
Answer Rent expense transferred to profit or loss is $4,200; prepaid rent is a $600 asset. The adjustment is Dr Prepaid rent $600; Cr Rent expense $600.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Insurance paid is $2,400, including $400 for next year. Calculate this year's expense and show the expense-ledger transfer and closing prepayment.
Give me a hint
Remove the unused future-period portion from the expense, then carry it forward as an asset.
Compare my reasoning
- Expense = 2,400 − 400 = $2,000.
- In the Insurance expense account, debit Bank $2,400; credit Prepaid insurance $400 and Income statement $2,000.
- The adjustment is Dr Prepaid insurance $400; Cr Insurance expense $400. The asset ledger carries forward $400.
Insurance expense transferred to profit or loss is $2,000; Dr Prepaid insurance $400; Cr Insurance expense $400. Closing prepayment asset: $400.
Look for these in your work
- Expense correct
- Ledger transfer correct
- Asset carry-forward correct
Wages of $3,600 were paid and $280 is owed for work completed before year-end. Show the adjusted expense and how the two ledger accounts are balanced.
Give me a hint
Add the accrued cost to wages expense, transfer the total, and carry the amount owed as a liability.
Compare my reasoning
- Wages expense = 3,600 + 280 = $3,880; debit Wages expense $280 and credit Accrued wages $280.
- Transfer $3,880 from the Wages expense account to the statement of profit or loss.
- Accrued wages has a $280 credit balance carried forward as a current liability.
Wages expense transferred to profit or loss is $3,880. Adjustment: Dr Wages expense $280; Cr Accrued wages $280. Accrued wages carries forward as a $280 liability.
Look for these in your work
- Expense correct
- Ledger transfer correct
- Liability balance correct
The period includes an electricity expense of $920, paid $70 in advance for next year, and an unpaid $110 bill for this period. Find the adjusted expense and net year-end adjustment balance.
Give me a hint
Deduct the prepaid part and add the accrued part.
Compare my reasoning
- Adjusted expense = 920 − 70 + 110 = $960.
- Prepayment asset $70; accrued-expense liability $110.
- The net liability position is $40, but show both items in their correct accounts.
Adjusted expense is $960; record a $70 prepayment asset and a $110 accrued-expense liability.
Look for these in your work
- Expense adjusted
- Both balances identified
- Net position distinguished
Common mistakes
- Adding a prepayment to current-period expense
- Treating an unpaid expense as an asset
- Changing the cash-book payment to match the adjusted expense
What can you explain now?
A service has been used by year-end but its invoice is unpaid. What adjustment is needed?
Compare with the explanation
Add expense and recognise an accrued-expense liability
The business incurred the cost in this period even though it has not paid yet.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How do accruals and prepayments change expense compared with cash paid?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.