An expense is accrued when the service was used but not yet paid. It is prepaid when the cash has been paid for a service not yet used. A dated timeline makes the difference visible before you write any entry.
This lesson is part of year-end adjustments that students confuse. For the standard entries behind it, see adjusting accruals and prepayments.
How do you draw the timeline?
Draw a line for the financial year, marking the start and the year-end date. Then mark the months the service covers and the date cash moved.
The months that fall inside the year are the expense. The months outside the year are not.
Worked example: one prepaid, one accrued
The year ends on 31 December. Two items appear in the trial balance of Kedai Amin.
Item 1: rent. RM3 000 was paid on 1 November for November, December and January.
Item 2: telephone. The bill for November and December is RM240. It arrives in January and is paid then.
| Item | Months in this year | Expense for this year | Year-end balance |
|---|---|---|---|
| Rent | 2 of 3 | RM2 000 | Prepaid RM1 000, current asset |
| Telephone | 2 of 2 | RM240 | Accrued RM240, current liability |
The rent is RM1 000 a month, so two months give RM2 000 and one month remains as a prepayment. The telephone was used but no cash moved this year, so the whole RM240 is charged and the unpaid amount is a liability.
The mistake that costs marks
The wording “rent paid RM3 000” pulls students into calling the whole amount an expense, or calling the unused part accrued. The working is neat, yet the timeline shows the error straight away.
| Step | Wrong | Right |
|---|---|---|
| Decide the type | Paid, so it is accrued | Cash came before the service, so prepaid |
| Expense for this year | RM3 000 | RM2 000 |
| Statement of financial position | Liability RM1 000 | Asset RM1 000 |
The fix is to ignore the word “paid” and read the dates instead.
What are the entries?
For the prepaid rent, reduce the expense: debit Prepaid rent RM1 000 and credit Rent expense RM1 000. For the telephone, add the expense: debit Telephone expense RM240 and credit Accrued telephone RM240.
Both balances then reverse at the start of the next year, so the January payments are not double counted.
Check yourself
Insurance of RM1 800 was paid on 1 September for 12 months. The year ends on 31 December. Find the expense for this year and state what the remaining amount is.
Answer
Monthly amount = 1 800 ÷ 12 = RM150. Four months (September to December) are used: expense = 4 × 150 = RM600.
Eight months remain, so 8 × 150 = RM1 200 is prepaid insurance, a current asset.
Timeline check: cash came in September, before most of the service, so the unused part is prepaid, not accrued.
What to study next
Continue with distinguishing depreciation expense from accumulated depreciation. For a one-to-one walk through your own timelines, see online one-to-one Accounting tuition.