Q:

What is the difference between prepaid and accruals?

A:

Quick Answer

Accounting-Simplified.com notes that a prepaid expense is one that has been paid in advance of products being delivered or services being rendered. An accrual is an expense that is paid after it is incurred, as when a company pays for materials 30 days after delivery. According to Investopedia, a prepaid expense is the opposite of an accrual.

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Full Answer

According to Accounting-Simplified.com, expenses must be recorded in the accounting period in which they are incurred. A prepaid expense is not recorded when it is paid. It is recorded when the service is rendered. A rent payment made before the first of the month is an example of a prepaid expense. The payment may be remitted at the end of June, but it is applied toward July expenses.

An accrued expense is also recorded in the company's financial records when the service is rendered or goods are delivered rather than when the payment is made. If a company orders materials that are delivered in May but is not required to pay for the materials until June, the transaction is recorded in May as an accrual, according to Accounting-Simplified.com.

Investopedia notes that accruals are considered to be a liability because they are documented in the company's records before they are paid.

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