Period-end adjustments exist because cash flows and the recognition of expense do not always occur in the same accounting period. A business pays its annual insurance premium in July, but the expense belongs to twelve separate months. A supplier completes work in June but does not issue an invoice until August. Without prepayment and accrual entries, the P&L swings wildly with the timing of payments and invoices rather than reflecting the economic activity of each period. The BAS can be similarly distorted if the accruals vs cash basis question is not handled correctly.
Prepayments: Expenses Paid Before the Benefit Is Consumed
A prepayment arises when cash is paid now for a future benefit — typically insurance premiums, rent paid in advance, annual software subscriptions, and professional membership fees. At the date of payment, the economic benefit has not yet been received, so the expenditure is an asset (a prepaid expense), not yet an expense.
The correct journal entry at the date of payment for, say, a $12,000 annual insurance premium paid on 1 July:
- Debit Prepaid Insurance (asset) $12,000
- Credit Bank $12,000
At month-end, $1,000 of the prepayment is recognised as expense (1/12 of the annual cost):
- Debit Insurance Expense $1,000
- Credit Prepaid Insurance $1,000
This entry repeats each month until the prepayment is fully amortised. After 12 months, the Prepaid Insurance account has a zero balance and $12,000 has been recognised as expense, spread evenly over the period to which it relates.
The alternative — expensing the entire $12,000 in July — overstates July's expenses and understates expenses for the remaining 11 months. For a monthly management report, this is misleading. For a quarterly BAS (under accruals), it also means July's quarter bears 12 months of expense rather than 3.
Accruals: Expenses Incurred but Not Yet Invoiced
An accrual is the mirror image of a prepayment: the service has been received but the invoice has not yet arrived. Common examples include electricity bills (consumed monthly, invoiced quarterly), subcontractor invoices issued 30 days after work is completed, and accounting fees for the year-end engagement that are not invoiced until three months into the following year.
If a subcontractor completes $5,500 of work in June but invoices in August, the June management accounts should include that cost. The journal entry at 30 June:
- Debit Subcontractor Expense $5,000
- Debit GST Paid $500 (estimated, see note below)
- Credit Accrued Expenses Payable $5,500
When the invoice arrives in August:
- Debit Accrued Expenses Payable $5,500
- Credit Accounts Payable $5,500
And on payment:
- Debit Accounts Payable $5,500
- Credit Bank $5,500
The GST treatment on accruals requires care. Under the accruals basis for GST, you can claim the input tax credit when the tax invoice is received — not when the accrual is raised. So if you include the $500 estimated GST in your June quarter BAS before the invoice has arrived, you are potentially claiming an input tax credit before you hold the required tax invoice. The safer approach is to raise the accrual net of GST (debit Expense $5,000, credit Accrued Expenses $5,000) and claim the GST input tax credit only once the actual invoice is received in August.
BAS Reporting: Accruals vs Cash Basis
The choice between accruals and cash basis GST reporting has a direct impact on how prepayments and accruals flow through the BAS.
Under accruals basis GST (the default for entities with turnover above $2 million, and optional for smaller entities), GST on sales is reported when the invoice is issued (regardless of when cash is received) and GST on purchases is reported when the tax invoice is received (regardless of when the payment is made). This means your BAS reflects invoices, not bank movements.
Under cash basis GST, GST on sales is reported when payment is received and GST on purchases is reported when payment is made. This is simpler but means that a $12,000 prepaid insurance premium — paid in full in July — generates a single $1,200 input tax credit in the July quarter rather than $300 per quarter.
The cash basis approach is available to entities with turnover under $10 million and creates a timing difference relative to the accruals approach. Bookkeepers who report on accruals basis GST but have been using a cash-basis mental model for prepayments will frequently either miss or double-count input tax credits.
Prepaid Expense Schedules and Automated Reversals
The most reliable way to manage prepayments across multiple clients is a prepaid expense schedule: a spreadsheet or cloud-hosted register that lists every active prepayment, the payment date, the total amount, the monthly amortisation amount, and the expected end date. Each month-end, you use this schedule to drive the amortisation journals — one line per active prepayment.
Most cloud accounting platforms (Xero, MYOB AccountRight, QuickBooks Online) support prepayment tracking through either a dedicated prepayments module or manual recurring journal templates. Xero's prepayment functionality allows you to record an overpayment or advance payment and then allocate it across future periods, but for subscription-style prepayments it is generally more robust to maintain the schedule manually and enter monthly journals.
Automated reversals are a related technique for accruals: you enter the accrual in period one and set a reverse journal to run automatically on the first day of period two. When the actual invoice arrives, you code it normally. The reversal and the invoice together produce the correct expense in the right period without the risk of double-counting. Not all platforms support automatic reversals; where they do not, a manual reversals register is essential.
The Software Subscription Mistake
One of the most common prepayment errors involves annual SaaS and cloud software subscriptions. A client pays $9,600 for an annual Xero subscription, AWS hosting, or a business software licence on 1 January. Under cash basis GST, the full input tax credit is claimed in the January quarter. But under the accruals basis for income tax, only the months that fall within the current financial year (January to June — half the subscription) are deductible in the current year; the July-to-December portion is a prepayment asset that crosses into the next income year.
For small business entities using the simplified depreciation rules under Subdivision 328-D, the prepayment rules under Division 82 of the ITAA 1997 provide a full deduction for prepaid expenditure where the eligible service period does not exceed 12 months. This means many small business entities can deduct the full annual subscription in the year of payment, without spreading it across periods. But for entities that are not SBEs — including any entity with aggregated turnover above $10 million — the general prepayment rule applies and the expense must be apportioned.
Confirming which prepayment rules apply requires knowing the client's aggregated turnover and whether they are using the SBE tax concessions. Do not assume the full deduction applies for every client.