Year-end entries: prepayments, accruals and provisions
At the year end, income and expenses belong to the year they relate to, whenever they are paid. These entries are exam favourites.
How to book it
- 1
Paid in advance, expense belongs to next year: debit Prepayments, credit the expense.
- 2
Expense belongs to this year, paid next year: debit the expense, credit Accruals.
- 3
Uncertain obligation (e.g. legal costs): debit the expense, credit Provisions; release unused amounts to income later.
- 4
Irrecoverable debt: debit Irrecoverable debts (net) and Output VAT, credit Trade receivables.
Worked examples
On 1 November, rent for November to April (6 months × £1,700.00) was paid in advance and booked as Rent. Book the year-end adjustment at 31 December.
Correct journal entry
Prepayments £6,800.00 / Rent £6,800.00
Debit
Prepayments£6,800.00
Credit
Rent£6,800.00
Why?
- Prepayments: asset increases → debit
- Rent: expense reduced → credit
Calculation
- 4 months belong to next year: 4 × £1,700.00 = £6,800.00
For a pending lawsuit we expect legal costs of £9,500.00. Book the year-end entry.
Correct journal entry
Legal and professional fees £9,500.00 / Provisions £9,500.00
Debit
Legal and professional fees£9,500.00
Credit
Provisions£9,500.00
Why?
- Legal and professional fees: expense incurred → debit
- Provisions: liability increases → credit
Calculation
- The amount is uncertain but the expense belongs to this year: a provision.
Your turn
Choose the accounts, enter the amounts and check. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
A provision of £10,500.00 was made for a lawsuit. In the new year the case ends and we pay only £6,900.00 in court fees by bank transfer.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
All cases on this topic
Typical mistakes
- Deferring the whole amount: only the part that belongs to next year is deferred.
- Mixing up provisions and accruals: a provision is uncertain in amount or timing.
Frequently asked questions
How do you book a prepayment at year end?
Debit Prepayments, credit the expense account with the part that belongs to next year.
How do you make a provision?
Debit the expense (e.g. Legal and professional fees), credit Provisions with the expected amount.