ACCA FA: The Accruals and Prepayments Mistake That Keeps Recurring

Accruals and prepayments look simple on the page: adjust an expense up or down, add an asset or a liability, move on. Yet this remains one of the areas in Financial Accounting (FA) where otherwise well-prepared candidates lose easy marks. The topic is not conceptually hard. The problem is that candidates learn the journal entries by rote without anchoring them to the underlying accounting concept, and under exam pressure the rote version breaks down.

This article covers where the mistake actually happens and how to check your own answer before committing to it. If you are working through this topic as part of your ACCA FA studies, treat it as a checklist to run against every accrual or prepayment question you attempt.

The accruals concept, in one sentence

The accruals (matching) concept says that income and expenses must be recognised in the period they relate to, not the period in which cash happens to move. A rent bill covering January is a January expense whether it is paid in December, in January, or not until March. This single idea is the entire justification for every accrual and prepayment adjustment you will make in FA — lose sight of it, and the journal entries stop making sense and become something to memorise rather than reason through.

That distinction between "when the cash moved" and "when the item relates to" is also what separates accruals accounting from cash accounting, and it is exactly the gap being tested when a question buries a period-end adjustment inside a longer set of trial balance figures.

Where candidates actually go wrong

The recurring error is not misunderstanding what an accrual or a prepayment is in the abstract — it is applying the adjustment in the wrong direction once the question is dressed up as a real scenario. Four slips account for most of the marks lost:

• Reversing the direction of the adjustment. An accrual for an unpaid expense increases the expense in the statement of profit or loss and is recognised as a current liability, because the business still owes for something it has already benefited from. A prepayment is the opposite: it reduces the expense and is recognised as a current asset, because the business has paid for a future benefit it has not yet received. Candidates under time pressure frequently swap these two, adding when they should subtract or booking an asset where a liability belongs.
• Treating income adjustments the same as expense adjustments. Accrued income (earned but not yet received) increases income and sits as a current asset — a receivable. Deferred income (cash received before it has been earned) decreases income for the period and sits as a current liability, since the business still owes the customer the goods, the service, or a refund. Because the asset/liability labels flip when moving from expenses to income, candidates who have only drilled expense-side questions often misclassify income-side ones on autopilot.
• Getting the double entry backwards. For an accrued expense: debit the expense account, credit a current liability (accruals). For a prepaid expense: debit a current asset (prepayments), credit the expense account, reducing it. Writing the debit and credit the wrong way round still leaves a trial balance that balances — which is exactly why the error is dangerous.
• Applying the adjustment to the wrong period. A common variant in longer questions is a payment that spans two accounting periods — twelve months' insurance paid ten months into the current year, for example. Candidates correctly spot that a split is needed but then prepay or accrue the wrong portion, usually because they anchor on the payment date rather than the coverage period.

A reliable way to check your own answer

Rather than memorising four separate rules, run one question every time: has the business already received the benefit, or is the benefit still to come? If the benefit has already been received but not yet paid for, that is a liability (an accrual) or an asset (accrued income, if you are owed the money). If cash has been paid or received but the benefit is not yet delivered, that is an asset (a prepayment, if you paid) or a liability (deferred income, if you received the cash). Asking "who has benefited, and who still owes what" forces you back to the underlying economics instead of pattern-matching a memorised entry, which is exactly where the reversed-direction error creeps in.

It is also worth sanity-checking your adjustment against the statement of profit or loss, not just the statement of financial position. If it has increased profit for a cost you have not actually avoided, or decreased profit for income you have not actually lost, the entry has likely gone in the wrong direction.

Why this keeps recurring across sittings

Accruals and prepayments rarely appear as a standalone, clearly labelled question in FA. Far more often they sit inside an extended trial balance or a set of year-end adjustment notes alongside depreciation, irrecoverable debts, and inventory valuation. Buried among several other adjustments, with limited time per mark, this is exactly the kind of entry a candidate reasons through carefully in isolated practice but rushes — and gets backwards — when several adjustments compete for attention in one question. Practising it inside mixed, multi-adjustment questions, not just on its own, is what closes the gap between understanding the concept and applying it reliably under pressure.

Frequently asked questions

Is an accrual an asset or a liability?

An accrual for an expense is a liability. It represents an amount the business owes because it has already received the benefit of a good or service but has not yet paid for it, so it is recorded as a current liability and increases the related expense in the statement of profit or loss.

Does a prepayment increase or decrease the expense for the year?

A prepayment decreases the expense recognised in the statement of profit or loss for the current period. The amount paid in advance is carried forward instead as a current asset, because it relates to a future period rather than the one just ended.

What is the difference between accrued income and deferred income?

Accrued income has been earned but not yet received in cash; it increases income for the period and is shown as a current asset (a receivable). Deferred income is cash received before it has been earned; it decreases income for the current period and is shown as a current liability, since the business still owes the customer the underlying good, service, or a refund.

Accruals and prepayments reward candidates who reason from the accruals concept rather than recite journal entries from memory. Build that habit early, practise it inside longer, multi-adjustment questions rather than in isolation, and it stops being a place where marks quietly disappear. Explore Learnsignal's ACCA FA course for structured practice on this and every other year-end adjustment.