Accruals are expenses incurred but not yet paid while prepayments are payments for expenses for that are not yet incurred. ... It is this matching principle that differentiates accrual accounting from cash-basis accounting, which records revenues and expenses when they are received and not when they are earned or incurred.

Should you accrue prepaid?

Prepaid expenses are expenses paid for in advance. You accrue a prepaid expense when you pay for something that you will receive in the near future. Any time you pay for something before using it, you must recognize it through prepaid expenses accounting. Prepaid expenses do not provide value right away.

How are prepayments accounted for?

From the perspective of the seller, a prepayment is recorded as a credit to a liability account for prepayments, and a debit to the cash account. When the prepaid customer order is eventually shipped, the prepayment account is debited and the relevant revenue account is credited.