The concepts of prepaid and accrued expenses can sometimes be confusing and, unless you deal with them all of the time, it can be easy to forget how to account for them properly.

First off, prepaid and accrued expenses generally are taken into account when your accounting records are prepared on the accrual basis.  When you are keeping your books on the cash basis of accounting, you are deducting expenses when you pay them; therefore, from purely an accounting point of view, you won’t have any expenses that you paid ahead of time or any expenses that you will owe someone for (even if you do still do owe someone for them).  You can read more about the cash versus accrual basis of accounting here. read more

One question that comes up often is what is: the difference between the cash basis of accounting and the accrual basis of accounting.

Essentially, there are two main ways to maintain your accounting records and report your earnings: the cash basis of accounting and the accrual basis of accounting.  There are other less used ways, but cash and accrual are the two most widely used methods and the two which we will talk about here.  Our discussion will focus on the difference in the reported earnings of a company.  It should be noted that there are balance sheet differences as well which are outside the scope of this limited explanation. read more