Accrued Expenses vs Prepaid Expenses: Key Differences Explained

Accrued expenses and prepaid expenses are both adjusting entries that exist because of accrual accounting — the principle that revenues and expenses are recognised when earned or incurred, regardless of when cash changes hands. They sit on opposite sides of that timing difference.

Prepaid Expenses: Pay First, Benefit Later

A prepaid expense is created when you pay for something before you receive the benefit. The cash has already left, but the expense has not yet been incurred. The prepayment therefore lives on the asset side of your balance sheet until the benefit is received.

• Annual insurance premium paid in January for January–December coverage
• Software licence paid for the full year upfront
• Rent paid in advance at the start of a tenancy
• Prepaid marketing retainer for future campaigns

Accrued Expenses: Benefit First, Pay Later

An accrued expense is the opposite: you have received the benefit, but you have not yet paid for it and may not yet have received the invoice. The cost has been incurred and must be recognised in the current period, creating a liability on your balance sheet.

• Electricity consumed in March but billed in April
• Professional fees for work completed in the period but invoiced next month
• Bonuses earned by employees but not yet paid
• Interest on a loan that has accrued but is not yet due

Balance Sheet Position

Prepaid expenses appear under current assets, typically below trade receivables. Accrued expenses appear under current liabilities, typically alongside trade payables. Both are reconciling items that need to be reviewed and cleared each period.

Common Mistakes

• Expensing a prepayment immediately when cash is paid (understates assets, overstates expenses in the period of payment)
• Forgetting to raise an accrual for a cost incurred late in the period (understates liabilities, understates expenses)
• Not reversing accruals in the following period when the invoice arrives (double-counting the expense)
• Leaving stale prepaid balances on the balance sheet after the coverage period has ended

Managing Both in One Place

Finance teams that track prepayments and accruals in separate spreadsheets often lose track of the relationship between the GL balance and the underlying schedules. CloseKit manages both in one place — giving you a real-time reconciliation of your prepaid asset and accrued liability accounts on any date.