Bookkeeping Basics · Edmonton
Accrued vs prepaid expenses: mirror images.
One is a cost you've used but not paid for. The other is a cost you've paid for but not used. Here's how to record both, with a full worked year.
By the Plum team- Updated Oct 2026
- 8 min read
- Accrued expense: you've used it, you haven't paid. It's a liability.
- Prepaid expense: you've paid, you haven't used it. It's an asset.
- Both exist so each month's costs land in the month they belong to.
- Prepaids shrink month by month; accruals clear when the bill arrives.
- For tax, CRA generally wants expenses deducted in the year they relate to.
Accrued vs prepaid expenses is one of those topics that sounds technical but comes down to a simple question: did the cash move before or after you got the benefit? If you paid first, it's a prepaid expense. If you got the benefit first, it's an accrued expense. They're mirror images, and once you see them side by side, you won't mix them up again.
This guide explains both with a worked example for a hypothetical Edmonton business, shows every journal entry, and covers how they appear in QuickBooks Online and on a Canadian tax return. It builds on adjusting journal entries, so read that first if the idea of period-end adjustments is new.
1Accrued vs prepaid expenses at a glance
| Prepaid expense | Accrued expense | |
|---|---|---|
| Cash moves | Before the benefit | After the benefit |
| Balance sheet type | Asset | Liability |
| Typical examples | Annual insurance, rent paid ahead, annual software, deposits on trade shows | Utilities for last month, wages earned but not paid, interest, a contractor's work not yet invoiced |
| Adjusting entry | Debit Expense, credit Prepaid | Debit Expense, credit Accrued liabilities |
| How it clears | A bit each month as it's used | All at once when the bill is recorded or paid |
In both cases, the expense lands in the month you actually used the thing. That's the whole point. A business that expenses a $3,000 insurance policy in February looks like it had a terrible February and eleven unusually good months. Neither is true.
2Prepaid expenses: a worked example
Say you run a small physiotherapy-supply shop in Edmonton with a December 31 year end. On February 1 you pay $3,000 for a twelve-month business insurance policy covering February 1 to January 31.
Insurance premiums are generally exempt from GST, so there's no input tax credit here: the full $3,000 is the cost.
Entry 1: paying the premium on February 1
| Account | Debit | Credit |
|---|---|---|
| Prepaid insurance (asset) | $3,000.00 | |
| Business chequing | $3,000.00 | |
| Totals | $3,000.00 | $3,000.00 |
Entry 2: at the end of each month, February to December
Each month uses $3,000 ÷ 12 = $250 of cover.
| Account | Debit | Credit |
|---|---|---|
| Insurance expense | $250.00 | |
| Prepaid insurance | $250.00 | |
| Totals | $250.00 | $250.00 |
By December 31, eleven months have been expensed: 11 × $250 = $2,750 of insurance expense this year. The remaining $250 stays on the balance sheet as prepaid insurance and becomes January's expense next year.
That matches how income tax generally works too: a prepaid expense is deducted in the year it relates to, so this year's return deducts $2,750, not $3,000.
3Accrued expenses: a worked example
Same business. December's electricity is used in December, but the bill doesn't arrive until mid-January. Based on usual bills, you estimate December's charge at $340 before GST.
Entry 3: accrue it on December 31
| Account | Debit | Credit |
|---|---|---|
| Utilities expense | $340.00 | |
| Accrued liabilities | $340.00 | |
| Totals | $340.00 | $340.00 |
Entry 4: the bill arrives in January for $340 plus $17 GST
If you reversed the accrual on January 1, you just enter the bill normally. If you didn't, record it against the accrual so the expense isn't counted twice:
| Account | Debit | Credit |
|---|---|---|
| Accrued liabilities | $340.00 | |
| GST paid on purchases (ITC) | $17.00 | |
| Accounts payable | $357.00 | |
| Totals | $357.00 | $357.00 |
Notice the GST isn't part of the accrual. You claim the input tax credit when you have the supplier's invoice, so it goes in with the bill. If the actual bill had been $352 instead of your $340 estimate, the $12 difference simply goes to January's utilities expense. Estimates don't need to be perfect, just reasonable.
Other accruals and prepaids you'll see often
- Prepaid: annual software plans, a trade show booth paid months ahead, rent paid before the month it covers, and annual professional or licensing fees.
- Accrued: wages for days worked since the last pay run, the employer share of CPP and EI on those wages, interest on a loan or line of credit, and a subcontractor's work finished in the month but not yet invoiced.
The test is always the same two questions: has the business received the benefit, and has cash moved? Answer both and you know which one you're looking at.
4How they show on your financial statements
Here's what the two examples look like on the business's December 31 balance sheet and its profit and loss for the year:
| Statement | Line | Amount |
|---|---|---|
| Balance sheet, current assets | Prepaid insurance | $250 |
| Balance sheet, current liabilities | Accrued liabilities | $340 |
| Profit and loss | Insurance expense | $2,750 |
| Profit and loss | Utilities expense (includes December's accrual) | Twelve months of power, not eleven |
Without the adjustments, the year would show $3,000 of insurance (too much, by one month that belongs to next year) and only eleven months of electricity (too little, because December's bill arrives in January). The two errors happen to partly offset here, which is exactly why they're easy to miss. In a bigger business, or with bigger bills like rent, a contractor's work or a quarter's interest, they don't offset and your profit is simply wrong.
When you read a balance sheet, prepaid expenses and accrued liabilities are useful signals. A large prepaid balance means you've already paid for future months, which is good for cash planning later. A large accrued liabilities balance means bills are coming that the bank balance doesn't show yet. Our guide on how to read a balance sheet shows where they sit.
Cash or accrual for tax in Canada
CRA generally expects business income to be calculated on the accrual basis, with exceptions such as farming and fishing. That's why your accountant asks at year end about bills you haven't received yet and payments that cover next year. Even if you keep your day-to-day books mostly on a cash basis, these year-end adjustments are what bring them in line. Our guide to cash vs accrual accounting in Canada explains the difference in more depth.
5Accrued and prepaid expenses in QuickBooks Online
- Set up the accounts. In the chart of accounts, add Prepaid expenses (type: Other Current Assets) and Accrued liabilities (type: Other Current Liabilities). Our guide to the chart of accounts for small business in Canada shows where they fit.
- Pay the prepaid as a normal expense or cheque, but choose Prepaid insurance as the category instead of Insurance.
- Release it monthly with a recurring journal entry (from + New, then Journal entry, then make it recurring) for the monthly amount.
- Accrue at period end with a journal entry dated the last day of the month, and reverse it on the first day of the next month.
- Review the balance sheet. Prepaid expenses should shrink toward zero as policies run out. If the balance only ever grows, monthly releases aren't happening.
6Common mistakes with accrued and prepaid expenses
- Expensing a big annual payment all at once, then wondering why one month looks awful.
- Accruing and then also entering the bill, so the expense lands twice.
- Prepaid balances that never move. A policy from two years ago is still sitting on the balance sheet.
- Including GST in an accrual, then claiming the ITC again when the bill arrives.
- Confusing prepaid expenses with deposits. A refundable security deposit you've paid isn't used up over time; it stays an asset until you get it back.
- Mixing up the mirror image. Customers paying you in advance isn't a prepaid expense; that's unearned revenue, a liability on your side.
Quick check before each close
Getting these right is what makes your monthly profit trustworthy, and it's a standard part of the month-end close Plum does for businesses in Edmonton, Leduc, Beaumont and Sherwood Park. If you'd like monthly numbers you can actually plan with, book a quick call.
7Questions people ask
What is the difference between accrued and prepaid expenses?
An accrued expense is a cost you've incurred but not yet paid or been billed for, so it's a liability. A prepaid expense is a cost you've paid for in advance but not yet used, so it's an asset.
Is a prepaid expense an asset?
Yes. It's an asset because the business is still owed something: future months of insurance, rent or software. It becomes an expense gradually as those months pass.
Is an accrued expense a liability?
Yes. It represents an amount you owe for something you've already received or used, like a month of utilities or wages, before the bill arrives or the payment is made.
Can I deduct a full year of prepaid insurance in the year I pay it?
Generally not. For income tax, prepaid expenses are generally deducted in the year they relate to, so the portion covering next year is deducted next year. Your accountant will adjust for this at year end.
Do small businesses need to record accruals and prepaids?
For small amounts, many businesses skip monthly adjustments. But at year end, material prepaids and accruals should be recorded so the tax return reflects the correct year.
Want this off your plate?
Flat-fee bookkeeping for Edmonton small businesses. Month to month, no surprises.
Book a free 15-min callThis article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.