Prepayments and accruals in Xero, explained

Written by an ACA-qualified finance manager · about the author · Last reviewed 1 July 2026

These are the two adjustments that trip people up most at month-end - and they’re simpler than they sound. Here’s what they are and how to handle them in Xero.

The one-line version

Prepayment: you’ve paid for something now that you’ll benefit from later - so you hold the cost on the balance sheet and release it over the period it covers. Accrual: you’ve had the benefit now but haven’t been billed yet - so you book the cost now and clear it when the invoice arrives. Both exist to put the cost in the right month, regardless of when cash moves.

Prepayments, worked

Say you pay £1,200 for annual insurance in January. The cost belongs across all twelve months, not just January. Post the £1,200 to a prepayments account on the balance sheet, then each month journal £100 from prepayments to the insurance expense. By December the prepayment is nil and each month carried its £100. Other common ones: annual software licences, rent paid in advance, subscriptions.

Accruals, worked

Say you know March’s electricity was about £300 but the bill won’t land until April. To put the cost in March, journal £300 to the electricity expense and to an accruals account on the balance sheet. The cleanest approach is a reversing accrual: reverse it on 1 April, so when the real bill arrives it posts as normal and you don’t double-count. Typical accruals: utilities, professional fees, and your own accountant’s bill.

Keep a schedule

Both are movement schedules: last month’s closing balance is this month’s opening, you release what’s due and add anything new, and the schedule total should tie to the GL balance. If it doesn’t tie, something’s been posted around the schedule - find it before you sign off.

Frequently asked questions

What’s the difference between a prepayment and an accrual?

A prepayment is cash paid in advance of the benefit (held as an asset, released over time). An accrual is a cost incurred before the invoice arrives (recognised now as a liability, cleared when billed). Both move the cost into the correct month.

What is a reversing accrual?

An accrual you automatically reverse at the start of the next month. It means that when the real invoice arrives, it posts normally without double-counting the cost you already recognised.

Does Xero handle prepayments and accruals automatically?

Xero can run fixed-asset depreciation, but prepayments and accruals are usually manual journals supported by a schedule. The key discipline is rolling that schedule forward and tying its total back to the ledger each month.