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How do accruals and prepayments work in my company's accounts?

In the year they belong to.

Costs and income go in the year they relate to, not the year the cash moves. Unpaid costs of the year are accruals, and costs paid for next year are prepayments, each with its own balance sheet line.

Published

At a glance

Applies to
Every . Its accounts are drawn up on the ""
Where it shows
Two lines: "" among your assets, and "Accruals and deferred income" among your liabilities
Tax timing
Pay a bonus or salary you have within 9 months after your year end. If you pay later, it is only when paid

Sources

This entry is general information for directors of UK private limited companies, not advice about a particular company.

What to do

  1. List costs of the year you had not paid by the year end. Record them as a cost of the year and as an amount you owe. These are "".

  2. List payments you made for next year. Carry them forward as an asset. These are "".

  3. Do the same for income. Record income you have earned but not yet invoiced. The income section below explains when that is. Treat cash received for work not yet done as an amount you owe.

  4. Add staff costs your staff have earned but not been paid. Include holiday they can carry forward, and any bonus you are obliged to pay.

  5. Check when you will pay accrued salary or bonuses. If you pay after the 9 months following , the tax moves to the year you pay.

Sources

How it works

Costs and income go in the year they belong to

are drawn up on the "". You record something as an asset, a liability, income or a cost when it meets the tests for that item. Only items that meet those tests go on your balance sheet.

An asset is something your company because of past events, which can bring it . A liability is a duty to pay or hand over something, which already exists because of past events.

Our working: these tests look at what has already happened, not at when cash moves. So a bill for something used up in the year is a cost of that year, paid or not. Something paid for but not yet used can be an asset instead.

For example

Say you get a £300 electricity bill in January 2027 for power used in December 2026.

The £300 is a cost of 2026. At 31 December 2026 you owe it, so it is an accrual.

Do not net costs against income, or amounts you owe against amounts owed to you, unless the standard allows it.

Sources

The detail The exact rules

paragraph 2.24: a "shall prepare its financial statements using the accrual basis of accounting". Items are recognised as assets, liabilities, equity, income or expenses when they satisfy the definitions and recognition criteria for those items. Paragraph 2.43: assets and liabilities, or income and expenses, are not offset unless required or permitted by the FRS.

Paragraph 2.9: an asset is a present economic resource controlled by the micro-entity as a result of past events. Paragraph 2.14: a exists when the micro-entity has an obligation, to transfer an economic resource, that is a present obligation existing as a result of past events. Paragraph 2.19: a present obligation exists as a result of past events only if the micro-entity has already obtained economic benefits or taken an action, and as a consequence will or may have to transfer an economic resource it would not otherwise have had to transfer. Paragraph 2.26: only items meeting the definition of an asset, a liability or are recognised in the balance sheet.

That costs belong to the period they relate to, rather than the period the cash moves, follows from paragraph 2.24 read with these definitions.

Sources

"Prepayments and accrued income" and "Accruals and deferred income"

Both micro-entity layouts have these two lines. "" is on the assets side. "Accruals and deferred income" is on the liabilities side.

Once you choose a layout, use the same one in later years. You can change only if the directors think there are special reasons.

An amount you owe counts as due within one year, unless you can put off paying it for at least 12 months. That right must be unconditional at the .

For example

Say you pay £600 on 1 July 2026 for 12 months of software.

Cost for 2026
£600 × 6/12
£300
Prepayment
£600 × 6/12
£300

£300 is a cost of 2026. The other £300 is a prepayment, an asset carried into 2027.

You do not need a note about or prepayments. None of the four notes a micro-entity must give covers them.

Sources

The detail Layout rules

A micro-entity need show only the items in either Section C of Schedule 1 to SI 2008/409. Both list "Prepayments and accrued income" and "Accruals and deferred income" as items of their own. Paragraph 2A: once a format is chosen, the directors must use the same one in later years unless in their opinion there are special reasons for a change. FRS 105 paragraph 4.3 requires the same formats. Paragraph 4.4: a is due within one year when the micro-entity does not have an unconditional right, at the reporting date, to defer settlement for at least 12 months. The micro-entity minimum accounting items are presumed to give a true and fair view (Companies Act 2006, section 396(2A)).

Sources

Wages, holiday pay and bonuses

Wages, holiday pay, bonuses and similar are "short-term" if you expect to settle them within 12 months. The 12 months run from the end of the year the work was done.

You record them as a cost as your staff earn them, unless they form part of the cost of an asset, such as . Anything not yet paid at the year end is an amount you owe.

If you have paid more than you owe, the extra is an asset, as long as it will cut future payments or be refunded. You use the full amount, with no discount for paying later.

Holiday that staff can carry forward builds up as they work. Record the extra you expect to pay for the days at the year end. Show it as due within one year.

For example

Say at 31 December an employee has 3 unused days of holiday to carry forward, and each costs you £120.

Holiday pay owed
3 × £120
£360

You record £360 as a cost of the year and an amount you owe.

Record a bonus only if, at the year end, your company has no realistic choice but to pay it, and you can estimate it reliably. Why? A bonus you could still decide not to pay is not yet a duty your company owes.

Sources

The detail Staff costs in full

FRS 105 paragraph 23.1(a): short-term benefits are those (other than termination benefits) expected to be settled wholly before 12 months after the end of the reporting period in which the employees render the related service. Paragraph 23.3: they include wages, salaries and social security contributions; paid annual leave and paid sick leave; profit-sharing and bonuses; and non-monetary benefits for current employees.

Paragraph 23.2: the cost of benefits employees have become entitled to through service in the period is recognised as a liability, after deducting amounts already paid, and as an expense (unless another section requires it to be part of the cost of an asset). If the amount paid exceeds the obligation, the excess is an asset to the extent that it will lead to a reduction in future payments or a cash refund. Paragraph 23.4: amounts are measured at the undiscounted amount expected to be paid.

Paragraph 23.5: the expected cost of accumulating compensated absences is recognised when employees render service that increases their entitlement, measured at the undiscounted additional amount expected to be paid as a result of the unused entitlement accumulated at the reporting date, and presented as falling due within one year. Paragraph 23.7: the expected cost of profit-sharing and bonus payments is recognised only when (a) there is a present legal or constructive obligation to make them as a result of past events, meaning no realistic alternative but to make the payments, and (b) a reliable estimate can be made.

Sources

Rent

For an ordinary rental of premises or equipment (an ""), spread the rent evenly over the lease. Do this even if the payments are uneven. The exception is where another set pattern better matches how you benefit over time. Leave out charges for services such as insurance and maintenance.

Incentives from the landlord, such as a rent-free period, are spread over the lease too. They reduce the rent cost.

For example

Say you rent a unit for 24 months at £600 a month, with the first 4 months free.

Total rent
20 × £600
£12,000
Cost per month
£12,000 ÷ 24
£500
Cost in the first 12 months
12 × £500
£6,000

You pay only 8 × £600 = £4,800 in that time, but the cost is £6,000.

Sources

The detail Lease rules

FRS 105 paragraph 15.14: a lessee recognises lease payments under operating leases (excluding costs for services such as insurance and maintenance) as an expense over the on a , unless another systematic basis is representative of the time pattern of the user's benefit, even if the payments are not on that basis. Paragraph 15.15: the aggregate benefit of lease incentives is recognised as a reduction to that expense over the lease term, on the same basis. Appendix I: lease incentives include initial periods of the lease provided by the lessor rent-free or at a reduced rent.

Sources

Income you have earned but not billed, or billed before earning

You record income when you do what you promised the customer, that is, when the customer gets control of the goods or service. Regular services such as cleaning are done over time, as the customer receives the benefit.

For work done over time, you record income in line with your progress. If you bill a fixed rate per hour, you record what you have a right to invoice. So income follows what you have done for the customer, not the invoice or the cash.

Cash a customer pays before you leaves you with a duty to provide the goods or service. That makes it a liability. The micro-entity layout does not say which line holds it. The fuller layout for larger companies puts payments received on account of orders under "Other creditors", unless shown as a from stocks.

For example

Say a customer pays a £500 deposit in December 2026 for work you will do in February 2027.

At 31 December 2026 the £500 is an amount you owe, not income of 2026.

The revenue rules changed for periods starting on or after 1 January 2026. The new rules apply only to contracts that begin after your company first uses them. Contracts already in progress keep your old approach.

Sources

The detail Revenue rules

FRS 105 paragraph 18.34: revenue is recognised when (or as) the micro-entity satisfies a promise to transfer a good or service, which is transferred when (or as) the customer obtains control of it. Paragraph 18.37(a): a performance obligation is satisfied over time if the customer simultaneously receives and consumes the benefits as the micro-entity performs (for example routine or recurring services such as a cleaning service). Paragraph 18.41: revenue over time follows progress towards complete satisfaction. Paragraph 18.45: where the micro-entity bills a fixed amount for each hour of service, it recognises revenue in the amount it has a right to invoice.

Customer deposits: read together, paragraphs 2.14, 2.17(b) and 2.19 mean that cash received before delivery leaves an obligation to provide goods or services, which is a liability. The Section C formats do not say which item holds it. In the Section B formats, note (7) says payments received on account of orders must be included under "Other creditors" in so far as they are not shown as deductions from stocks.

Paragraph 1.11: on first applying the Periodic Review 2024 amendments (periods beginning on or after 1 January 2026), the revised Section 18 applies prospectively to contracts that begin after that date, and the accounting policy for contracts in progress does not change.

Sources

Unpaid pay, pensions and your Corporation Tax

Your company's starts from accounts drawn up under normal accounting rules, with any changes the tax law requires. Two of those changes are about timing.

Unpaid salary and bonuses. This covers pay charged in your accounts that would otherwise be deductible. If it is not paid within 9 months after your year end, it is deducted in the year you pay it. If it is never paid, it is never deducted.

This covers directors. The rule counts an as an employee, and HMRC says a company director is an office holder. HMRC applies the rule to office holders' pay. Pay counts as paid when it is treated as received for Income Tax on employment income.

For example

Say your year ends 31 December 2026 and you pay an accrued £2,000 bonus on 15 November 2027. It is otherwise deductible.

The 9 months ended on 30 September 2027. The bonus is deducted in the year to 31 December 2027, not 2026.

Pension contributions. Employer contributions to a , if allowed as a deduction, are deducted in the year they are paid. They are not deducted in any other year. This is subject to separate rules that spread the relief for some contributions.

Micro-entity accounts never show , the future tax effects of this year's figures. So these timing gaps create no tax balance in the accounts.

Sources

The detail The tax rules

Corporation Tax Act 2009, section 46(1): are calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law.

Section 1288: if an amount is charged in a company's accounts for employees' remuneration, would apart from this section be deductible, and is not paid before the end of the 9 months immediately following the end of the , the deduction is allowed for the period of account in which it is paid. No deduction is allowed if it is not paid. Section 1289(5): "employee" includes an office-holder. Section 1289(4): remuneration is paid when it is treated as received by an employee under ITEPA 2003 section 18 or 19. HMRC's Employment Status Manual (ESM2503): "a director of a company is an office holder". BIM47135: the nine-month rule covers remuneration of office-holders. BIM47130: remuneration is paid when it is treated as received by an employee for the charge to Income Tax on employment income.

Finance Act 2004, section 196(2)(b): employer contributions under a registered pension scheme, if allowed to be deducted, are deductible for the period of account in which they are paid. Section 196(6): this is subject to the in sections 197 and 198. BIM46010: they are allowed "for the period of account in which they are paid by the employer, and for no other period".

FRS 105 paragraph 24.7: a micro-entity shall not recognise deferred tax.

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Consequences

If you get it wrong

If you record costs when you pay them, rather than in the year they belong to, your profit can be wrong in both years.

A bonus recorded without a duty to pay it at the overstates your costs.

If an salary or bonus is paid more than 9 months after your year end, it cannot be for that year. The deduction moves to the year you pay.

Sources

Less common situations

Your Corporation Tax return is done before the 9 months are up. Assume any pay still unpaid will not be paid in time. If it is paid in time, you can revise the figures and amend the return.

A bonus you decide after the year end. Record it in the year only if your company already had to pay it at the .

Sources

Worked example: Bramley Studio Ltd

Bramley Studio's accounts for 2026 show of £36,000, other charges of £12,300 and profit before tax of £27,500. Bramley changed its to 31 December on 20 May 2024, so 2026 is a calendar year.

For this example, say these things happened. On 1 October 2026, Bramley paid £1,200 for 12 months' insurance. At 31 December 2026 it was obliged to pay Priya a £3,000 bonus, included in staff costs and paid on 31 March 2027. Say the bonus is otherwise .

It also a £600 pension contribution for December, paid in January 2027. Say the pension scheme is registered, the contribution is deductible, and it is not spread.

In the 2026 accounts

  • Insurance cost for 2026

    £300

    £1,200 × 3/12, for October to December

  • Insurance prepayment

    £900

    £1,200 × 9/12, carried into 2027

  • Bonus

    £3,000

    A cost of 2026. Bramley had to pay it at 31 December

  • Pension contribution

    £600

    A cost of 2026, earned in December

Sources

For Corporation Tax

  • Bonus

    2026

    Paid 31 March 2027, inside the 9 months ending 30 September 2027. Priya is an office holder

  • Pension contribution

    2027

    Deducted when paid, in January 2027

Sources

Not covered here

Pension schemes that are not registered, how the work, and holiday that cannot be carried forward. See whether your company can deduct your salary and pension, how the micro-entity accounts are laid out and leases.

Where this comes from

71 official sources. Open a group to see them.

The law 24 sources
HMRC 14 sources
GOV.UK 7 sources
Companies House 2 sources
FRC 24 sources

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