# Accruals, Prepayments and Depreciation

The three entries almost every business posts at period end, and the only three most businesses ever need.

Each one exists to put a cost in the month it belongs to rather than the month it was paid in.

![An open journal entry, JE-00001, showing its date, reference, status and the account lines with their debit and credit amounts.](https://www.sorviai.com/help/journal-entries/journal-detail.png)

*An accrual and its reversal are two entries. Both stay visible, which is what makes the pair auditable.*

## Accruals

The electricity was used in September, the bill arrives in October, and September looks cheaper than it was. An accrual fixes that by recognising the estimated cost in September and reversing it when the real bill lands.

1. **September**: Accrue the estimate: debit expense, credit accruals
2. **1 October**: Reverse the accrual
3. **October**: The real bill posts as normal
4. **Net effect**: The cost sat in September, once

> **Tip:**
>
> **Always reverse an accrual**
>
> An accrual that is not reversed leaves the cost recognised twice once the real bill arrives. Reversing on the first day of the next period is the habit that prevents it.

## Prepayments

A twelve-month insurance premium paid in January is not a January cost. Post the payment as normal, then move eleven twelfths into a prepayments asset and release one twelfth each month.

| Month | Entry |
| --- | --- |
| January | Debit prepayments, credit insurance expense, for eleven twelfths |
| February to December | Debit insurance expense, credit prepayments, one twelfth each |
| End of December | Prepayments account is zero again |

## Depreciation

A van bought for cash is an asset, not an expense. Depreciation is the monthly entry that turns a slice of it into a cost, over whatever life your accounting policy sets.

- **Record the purchase as an asset**

  On a fixed asset account, not an expense account.
- **Agree the life and method with your accountant**

  Straight line over three or five years covers most cases.
- **Post monthly**

  Debit depreciation expense, credit accumulated depreciation.
- **Attach the schedule**

  So next month's entry is a lookup rather than a calculation.

> **Note:**
>
> **There is no recurring journal**
>
> Depreciation is posted manually each period, or as part of a period-end routine. Keep the schedule attached to the first entry so the rest are quick.