Accruals and prepayments at year-end: prepaid and still to pay
Written by Ilias Aarrass5 min read · Published on · Last reviewed on 
In short
Accruals and prepayments ensure that costs and income end up in the year they belong to: prepaid costs, accrued costs, accrued income and deferred income. Large or one-off amounts must be split; small annually recurring costs may consistently be booked in the year of payment.
- There are four types: prepaid, accrued costs, accrued income and deferred income.
- Large or one-off amounts across the year-end must be split.
- Small recurring costs may stay in the year of payment.
- VAT follows the invoice date, not the accrual.
Your profit must relate to the year in which you earn it, not the year in which money happens to come in or go out. For most items those coincide. But around the turn of the year there are always amounts that cross the line: prepaid costs, bills still to come and income you have already earned but not yet invoiced. These are called accruals and prepayments. This article covers which types there are, when you need to book them and when you can keep it simple.
The four types
Accruals and prepayments sit on the balance sheet, on the side of assets or of liabilities. There are four variants, two for costs and two for income.
| Type | Example | Balance sheet side |
|---|---|---|
| Prepaid costs | Annual insurance paid in October | Asset |
| Accrued costs | December phone bill, invoiced in January | Liability |
| Accrued income | Work in December, invoiced in January | Asset |
| Deferred income | Client prepays a year of coaching in December | Liability |
A worked example
Say you pay a software subscription of 1,200 euros for twelve months on 1 October 2026. Three months of it belong to 2026, nine to 2027. If you book the full 1,200 euros as costs in 2026, your 2026 profit is too low and your 2027 profit too high.
Annual subscription of 1,200 euros, paid on 1 October
- 2026 costs (October to December)
- 300 euros
- Prepaid on the balance sheet at 31 December
- 900 euros
- 2027 costs (January to September)
- 900 euros
Result: On 1 January 2027 you move the 900 euros from the balance sheet back to costs. That way each year gets exactly its own share.
Is that always needed, even for small amounts?
The law requires sound business practice, which includes allocating profit to the right year. At the same time the tax authorities accept that you do not create an accrual for small, annually recurring amounts. If you pay the same insurance every October, roughly the same amount ends up in costs each year on balance. You may then apply that simplification consistently.
For large or one-off items you do have to split. Think of a three-year contract you prepay, a large assignment that runs across the year-end or a client who pays in advance. Income you have already earned but only invoice in January also belongs to the old year; for ongoing projects see valuing work in progress and for client prepayments booking advances and deposits.
How to handle it at year-end
In January, go through your bank statements for October to December, and the first invoices that arrive in January. Anything that crosses the line and is more than a few hundred euros, set aside. Book the accrual at 31 December and reverse it at 1 January. How these items land on your balance sheet is explained in reading a balance sheet and profit and loss account. Include it in your year-end checklist.
Frequently asked questions
What is an accrual or prepayment?
An amount on the balance sheet that ensures costs or income end up in the year they belong to, even if the payment or invoice falls in another year.
Do I need to book accruals as a freelancer?
For large or one-off amounts, yes. Small, annually recurring costs you may consistently book in the year of payment.
Does an accrual change my VAT return?
No. VAT follows the invoice date. Accruals and prepayments only affect your profit.
Sources
- Costs you must deduct over several yearsBelastingdienst · belastingdienst.nl
Sources checked on
This article provides general information based on the rules known for 2026 and does not replace personal tax advice. For your specific situation, we're happy to take a look with you.
