A handful of accounts trip people up every month: prepayments, accruals, VAT, PAYE. They feel technical, but their job is simple. They make your P&L tell the truth, and they hold money that was never really yours.
Two jobs, really. Prepayments and accruals move a cost onto the month it actually belongs to, not just the month you happened to pay it. Control accounts like VAT and PAYE hold money that's passing through you on its way to someone else.
A prepayment is money you've paid in advance for something you'll use over time.
You pay £12,000 in January for a year of insurance.
If the whole £12,000 hit January, January would look far worse than it really is. So only £1,000 lands on the P&L each month, and the rest sits on the balance sheet as a prepayment, an asset that counts down to zero as you use it up.
An accrual is the mirror image: you've had the benefit, but the bill hasn't arrived yet.
A contractor does £2,000 of work in March, but invoices you in April.
March got the value, so March should carry the cost. You accrue it: the £2,000 hits March's P&L, and an accrual sits on the balance sheet as a liability until the real invoice turns up.
VAT is not your money. You collect it from clients and pass it to HMRC, so it never touches the P&L; revenue and costs are shown without it.
You invoice £10,000 plus £2,000 VAT.
The £10,000 is revenue. The £2,000 sits in a VAT control account on the balance sheet: VAT you've charged, less VAT you've paid on your own costs, netting to what you owe HMRC.
Payroll works the same way. When you run it, the full wage cost hits the P&L, but the money splits three ways.
A £5,000 gross wage: net pay to the employee, income tax and National Insurance to HMRC.
Until you actually pay them, the net wages sit in a payroll control account and the tax sits in a PAYE control account. Both are liabilities on the balance sheet: money you're holding on someone else's behalf.
See the pattern. Prepayments and accruals move costs to the right month, so profit is honest. Control accounts park money that's only passing through you. Get these wrong and two things happen: your profit is wrong, and you start mistaking the taxman's money for your own.
So build two habits. Match every cost to the month it belongs to with prepayments and accruals. And reconcile your control accounts, VAT, PAYE and payroll, every single month, so you always know exactly what you owe and what's really yours.
### Suggested running order (optional)
A natural learning arc, once pillars are set:
1 → 3 → 4 → 5 → 6 → 7 → 8 → 9 → 2 → 10(1) → 10(2) → 11 → 12(1) → 12(2) → 13(1) → 13(2)
Start with survival (runway), then how you price and bill, then how you review and account for it, finishing with contracts. Reorder freely per pillar.