Accruals and prepayments in small company accounts: a worked example

In short: An accrual is a cost the company has used but not yet been billed for; a prepayment is a cost paid in advance for a later period. Accrued income and deferred income do the same for sales. Limited companies can't use the cash basis (GOV.UK: Cash basis), so these adjustments put profit, and its Corporation Tax, in the right year. Taxley prepares and files the Company Tax Return (CT600) for £49.95 with micro-entity accounts that include prepayments and accruals lines, then files the accounts at Companies House once the return is paid and finished.

Take the 30-second check to see whether Taxley fits your company, or work out the tax on your adjusted profit with the free Corporation Tax calculator.

Key facts (checked on 4 October 2026)

What are accruals and prepayments in company accounts?

They are year-end adjustments that put income and costs in the period they belong to, whatever the date on the bill or the payment. An accrual adds a cost the company has used but not yet been billed for. A prepayment takes out a cost paid for a later period. Accrued income and deferred income do the same for sales.

All four come from the accrual basis of accounting. HMRC's manual, quoting FRS 102, says that on the accrual basis income and expenses are recognised when they meet the definitions and recognition criteria for those items, not as money is received or paid (HMRC manual BIM31030). For sales, the manual adds that income is generally earned when goods are provided or services performed, whatever the timing of invoices or payments (HMRC manual BIM31080). An unpaid customer invoice for finished work is a debtor rather than accrued income, because it has already been billed; our guide to unpaid invoices at the year end covers debtors and unpaid supplier bills.

Does a limited company have to use accruals accounting?

Yes. GOV.UK names limited companies among the businesses that can't use the cash basis (GOV.UK: Cash basis), and a company's trading profits for Corporation Tax must be calculated in line with generally accepted accounting practice (CTA 2009 s.46). Accounts prepared that way recognise income and costs when they are earned or used, not when cash moves.

The cash basis is the standard Income Tax basis for sole traders and partnerships without corporate partners, and GOV.UK gives limited companies as its example of businesses that can't use it (GOV.UK: Cash basis). For a company, HMRC's manual describes the accounts as "the starting point for ascertaining the taxable profit or loss" (HMRC manual BIM31047). So an accrual or prepayment that changes the accounts profit usually changes the profit on the Company Tax Return too, unless a tax rule says otherwise; our guide to accounting profit and taxable profit walks through the other adjustments. If you keep the books yourself, records that show each bill's date and the period it covers make the year-end adjustments easier; our guide to doing your own limited company bookkeeping lists what to keep.

Where do accruals and prepayments go in micro-entity accounts?

On two lines of their own on the balance sheet. Micro-entity balance sheet Format 1 lists item D, "Prepayments and accrued income", straight after current assets, and item J, "Accruals and deferred income", after provisions for liabilities (SI 2008/409 Sch 1 Part 1). The profit and loss account has no separate line: the adjustments change the income and cost figures themselves.

Format 1's full order is A called-up share capital not paid, B fixed assets, C current assets, D prepayments and accrued income, E creditors due within one year, F net current assets, G total assets less current liabilities, H creditors due after more than one year, I provisions for liabilities, J accruals and deferred income and K capital and reserves (SI 2008/409 Sch 1 Part 1, Section C). The alternative, Format 2, lists assets and liabilities separately, with accruals and deferred income as item D of its liabilities. In Format 1, item D comes before net current assets, so prepayments count towards that subtotal; item J comes off after provisions, on the way to net assets. GOV.UK says a micro-entity can send Companies House only its balance sheet, with less information (GOV.UK: Micro-entities, small and dormant companies), so both lines go on the public record. Our guide to what goes in micro-entity accounts explains every line, with an example.

How do small FRS 102 accounts show accruals and prepayments?

With more choice of position. In the general balance sheet formats used for small company accounts, prepayments and accrued income can be item D or sit inside "Other debtors", and accruals and deferred income can be item J in Format 1 or sit inside "Other creditors" (SI 2008/409 Sch 1 Part 1). Net assets come out the same either way.

The notes to the general formats set the rules. Prepayments and accrued income may go under item C.II.3, other debtors, instead of item D, and net current assets must take them into account wherever they are shown. In Format 1, accruals and deferred income may be shown under item J or included in other creditors due within one year (E.4), after more than one year (H.4), or both, as the case requires (SI 2008/409 Sch 1 Part 1, Section B). The choice changes subtotals such as debtors, creditors and net current assets, but not the profit. Our guide to what goes in FRS 102 small company accounts covers the rest of the format.

How do accruals and prepayments change profit and Corporation Tax?

They move profit between years, and the Corporation Tax moves with it. In the worked example below, four year-end adjustments raise a small company's profit from £40,000 to £41,150. At the 19% small profits rate (GOV.UK: Corporation Tax rates), its Corporation Tax rises from £7,600 to £7,818.50, an extra £218.50.

Example Print Ltd, a made-up company, has a 12-month accounting period ending on 31 December 2025 and no associated companies. Its draft profit of £40,000 counts sales when invoiced or paid and costs when billed or paid. All figures exclude VAT, and taxable profit is taken to equal accounting profit, with no other tax adjustments. Four items need a year-end adjustment:

• On 1 October 2025 it paid £1,200 for a year's insurance to 30 September 2026, all charged to 2025 in the draft.
• The electricity bill for October to December 2025, £450, arrived on 20 January 2026.
• Work finished in December 2025 was invoiced for £2,500 on 8 January 2026.
• A customer paid an £1,800 deposit on 15 December 2025 for a job done in February 2026, and the draft counted it as December sales.

The insurance covers 12 months, of which 3 fall in 2025, so £900 of the £1,200 belongs to 2026. Item D holds the £900 prepayment and the £2,500 of accrued income; item J holds the £450 accrual and the £1,800 of deferred income. The difference between the two, £1,150, is the extra profit before tax. Both profit figures are under £50,000, so the whole profit is taxed at 19% (GOV.UK: Corporation Tax rates). Had the adjustments taken profit over £50,000, the main rate less marginal relief would apply, and the free Corporation Tax calculator works that out. The tax is due 9 months and 1 day after the period ends (GOV.UK: Pay your Corporation Tax bill), so a missed adjustment changes the amount due that day.

What happens to accruals and prepayments the following year?

They reverse. In 2026, the prepayment becomes a cost, the accrual absorbs the electricity bill when it arrives, the accrued income is matched with the January invoice, and the deferred income becomes sales when the job is done. Over the two years, Example Print Ltd's total profit is the same; only the year it falls in changes.

The 2026 column compares the adjusted books with books that skip the adjustments: without them, 2026 would bear the electricity bill and count the January invoice as sales, while missing nine months of insurance and the February job. A bookkeeper clears each balance when the bill, invoice or work arrives, or posts a reversing entry on the first day of the new year. Timing still matters for tax, because the £50,000 small profits limit and marginal relief apply period by period, with lower limits for short periods and associated companies (GOV.UK: Corporation Tax rates). Moving profit between years can change the rate it is taxed at, and each year's tax has its own due date.

Do accruals always change the Corporation Tax bill?

Usually, but not always. Tax follows the accounts unless a tax rule says otherwise, and two exceptions involve staff costs. Pay charged in the accounts but not paid within 9 months of the period end is deducted when paid (CTA 2009 s.1288), and employer pension contributions are deducted in the period they are paid.

HMRC's manual confirms that remuneration paid after the nine-month period is deducted in the period of account in which it is paid (HMRC manual BIM47130). For Example Print Ltd, a bonus accrued at 31 December 2025 would need paying by 30 September 2026 to be deducted in 2025. Employer contributions to a registered pension scheme are deductible for the period of account in which they are paid (FA 2004 s.196), so an unpaid accrued contribution is added back in the computation and claimed when paid; our guide to director pension contributions has the detail. Neither rule changes the accounts: the accrual stays on the balance sheet, and the difference is dealt with in the tax computation.

How small can an accrual be before you leave it out?

There is no fixed figure. HMRC's manual, quoting FRS 102, says information is material if leaving it out or misstating it could influence the economic decisions of the people using the accounts, and that this depends on size, nature or both (HMRC manual BIM31045).

The same manual says materiality is an accounting concept, not a tax concept, and that accounts should be free from deliberate or systematic error (HMRC manual BIM31047). A small bill that recurs at the same level every year, such as a monthly phone bill paid a month in arrears, changes each year's profit very little whether or not it is accrued, because one year's missing month replaces the last. A year's insurance paid near the year end or a large deposit taken before the work starts can move profit, and the tax on it, noticeably. Apply the same approach every year and in both directions, so that the adjustments which raise profit aren't the only ones left out. A qualified adviser can review any item you're unsure about before you file.

How do you enter accruals and prepayments in Taxley?

As balance sheet figures, with the adjustments already in your profit and loss figures. Taxley (taxley.co.uk), UK online software that prepares and files the Company Tax Return (CT600) with HMRC and the annual accounts with Companies House, has a "Prepayments & accrued income" line and an "Accruals and deferred income" line in its Advanced editor.

In the Advanced editor, "Prepayments & accrued income" sits under current assets, with a hint that it means costs paid in advance, such as insurance, plus income earned but not yet invoiced. For micro-entity accounts, "Accruals and deferred income" comes after provisions for liabilities, as item J; for small FRS 102 accounts it sits with creditors due within one year, and Taxley's small accounts show prepayments inside debtors and accruals inside creditors due within one year. A badge shows whether the balance sheet balances. In Simple mode, "Show all" adds the accruals line, and a prepayments figure is entered in Advanced. If you file micro entity accounts online with your CT600, any figures you enter on these lines appear on the balance sheet Taxley prepares.

When you import a trial balance, Taxley suggests a line for each account it can: one named prepayments, prepaid or accrued income is suggested for debtors, and one named accruals, accrued expenses, deferred income or income in advance for creditors. You choose the line each account goes on before importing, and the Advanced editor also offers the separate prepayments and accruals lines. Taxley doesn't work out accruals or prepayments for you; it uses the figures you enter. The fee is £49.95 with micro-entity accounts or £129 with small company accounts, including filing the accounts at Companies House once the return is paid and finished. Take the 30-second check to see whether Taxley fits your company, or see what each return costs.

Frequently asked questions

Is a prepayment an asset or an expense?

An asset at the year end. The part of a payment that covers a later period sits on the balance sheet under prepayments and accrued income, then becomes an expense in the period it covers, as Example Print Ltd's £900 of insurance does in 2026.

Is deferred income a liability?

Yes. Money received for goods or services not yet supplied sits in accruals and deferred income until the company delivers. HMRC's manual says income is generally earned when goods are provided or services performed, not when invoices go out or payments arrive (HMRC manual BIM31080).

Do micro-entity accounts need accruals and prepayments?

Yes, where they matter. The micro-entity balance sheet format has its own lines for prepayments and accrued income and for accruals and deferred income (SI 2008/409 Sch 1 Part 1), and limited companies can't use the cash basis. Micro-entity accounts are shorter, not cash-based.

Should a bill that arrives after the year end go in last year's accounts?

Yes, if it is for goods or services used before the year end, as an accrual. HMRC's manual treats information received after the year end about conditions that existed at the year end as an adjusting event, which changes the accounts (HMRC manual BIM31040).

What is the difference between accrued income and a debtor?

A debtor is usually an invoice already sent and not yet paid; accrued income is income earned but not yet invoiced. On a micro-entity balance sheet, debtors sit in current assets (item C) and accrued income sits in prepayments and accrued income (item D).

General information, not personalised tax or accounting advice.