Accruals and prepayments both exist because of one core accounting idea: an expense (or revenue) belongs to the period it relates to — not necessarily the period it was paid in.
An accrual is an expense you've incurred but haven't paid yet. Think of your electricity bill: you use the power in January, but the bill doesn't arrive — and get paid — until February. The cost still belongs to January, so an accrual is recorded at the end of January to reflect that, even though no cash has moved.
A prepayment is the mirror image: you've paid for something before you've received the benefit. An annual gym membership paid upfront in January is a prepayment — the cash leaves your account immediately, but the benefit is delivered gradually across the following twelve months. Accounting spreads that cost across the periods it actually benefits, rather than dumping it all into January.
Getting this wrong is one of the most common bookkeeping errors we see: a 12-month insurance premium expensed entirely in the month it was paid, which overstates that month's costs and understates every month afterward. The fix isn't complicated — it's the timing that matters, not the debit and credit themselves.
As a rule of thumb: if you've received a benefit but haven't paid for it, that's an accrual. If you've paid but haven't received the full benefit yet, that's a prepayment.
Key takeaway
Accruals: benefit received, not yet paid. Prepayments: paid upfront, benefit received over time. Both exist so costs land in the period they actually belong to.