Prepayments, advances, and accruals in the equation
Objective: Apply the equation to transactions where cash and earning happen at different times.
Recommended first: How transactions affect the equation
Timing creates the trickiest cases. When cash moves before the benefit is used or earned, the business holds an asset or owes a liability in the meantime.
- Prepaying insurance: one asset (Cash) becomes another (Prepaid Insurance). Totals do not change.
- A customer paying in advance: Cash rises and a liability, Unearned Revenue, rises — the business owes the service.
- Wages earned but unpaid at month-end: a liability (Wages Payable) rises and equity falls through Wages Expense.
- Using supplies: the asset Supplies falls and equity falls through Supplies Expense.
These cases lead directly to adjusting entries, which you will study in Module 13. For now, focus on which parts of the equation move.
Timing questions reward patience. Ask two questions separately: has cash moved, and has the benefit been used or earned? If cash moved first, the business holds a prepaid asset or owes an unearned-revenue liability. If the benefit came first, the business has an accrued receivable or payable. Only when both have happened is the transaction fully settled.
Check your work
- Has cash moved yet?
- Has the service been performed or the cost used up?
- Which account holds the amount in the meantime?
A family prepays $800 for tutoring next month. Cash +$800; Unearned Revenue (liability) +$800. Equity is unchanged until sessions are delivered.
| Account | Debit | Credit |
|---|---|---|
| Cash | $800.00 | |
| Unearned Revenue | $800.00 |
Common mistakes
✗ Recording an advance payment as revenue immediately.
✓ Revenue waits until the service is performed; until then it is a liability.
✗ Treating a prepayment as an expense right away.
✓ Expense it over the period it covers.
Guided practice
Use hints freely here.
Item 1 of 2
Prepay insurance
Greenway Landscaping pays $1,560.00 today for twelve months of insurance coverage starting next month.
Independent practice
Try these without hints. Completing the lesson needs at least one independent item solved without revealing the answer.
Item 1 of 8
Accrue unpaid wages
At month-end, Corner Bean Café employees have earned $1,800.00 in wages that will be paid next week.
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Key terms
- Prepaid expense
- A cost paid before it is used.
- Unearned revenue
- Cash received before the service is performed.
- Accrued expense
- A cost incurred but not yet paid or recorded.
References and provenance
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting (accessed 2026-10-29)
Original lesson written for Bookkeeping Exercises (AI-assisted drafting). Calculations are verified by the platform's automated accounting tests. Not yet reviewed by a credentialed accountant. Updated 2026-10-29.