accrual and prepayment

To make an accrual you: 1 Increase an expense, because you have incurred the expense but not paid for it (therefore Dr expense) 2 Set up, as oyu say, a current libility (the accrual). This recognises that you owe someone money even though you might not have been invoiced for a service (therefore Cr Accruals/liabilities). A prepayment, as you say, is something that you have paid early. For example, in the UK people often pay car insurance up front. The double entry for the payment would be: Dr Insurance $1,200 (say) Cr Cash $1,200 However, three months into the year you have only 'consumed' or 'used' three months' of insurance and the other 9 months' would be a prepayment: Dr Prepayments (an asset because the insurance company has been paid in advance) $900 Cr Insurance $900 This leaves only $300 still insurance as an expense for the three months.