The cash paid for an expense and the expense for the year are different numbers, and the gap between them is made of the balances at the start and the end of the year. This is the full ledger method, and it appears in questions that give opening and closing accruals and prepayments and ask for the expense, or give the expense and ask for the cash paid.
It completes the module on accruals and prepayments, and uses the ideas from allocating an expense to the correct period.
Why do opening balances matter?
An accrual or prepayment at the start of the year is the closing figure of last year. It has already been dealt with in last year’s accounts, and the cash that settles it moves in this year.
- An opening accrual is a cost already charged last year. Paying it this year is not a new expense.
- An opening prepayment was paid last year for this year’s benefit. It becomes this year’s expense without any new cash.
- A closing accrual is this year’s cost not yet paid, so it is added.
- A closing prepayment is next year’s cost already paid, so it is removed.
How do you find the expense, step by step?
- Open the ledger account with the opening accrual on the credit side or the opening prepayment on the debit side.
- Enter the cash paid on the debit side.
- Enter the closing accrual on the debit side or the closing prepayment on the credit side, as the balance carried down.
- Find the missing figure. The balancing item is the expense transferred to the income statement.
- Check that both sides total the same.
Worked example
Kedai Aiman has a year end of 31 December 2025. For its rates: the opening prepayment is RM 300, cash paid is RM 2,400 and the closing prepayment is RM 450. For its electricity: the opening accrual is RM 280, cash paid is RM 3,300 and the closing accrual is RM 360.
Rates: expense = 2,400 + 300 − 450 = RM 2,250. The RM 300 relates to this year though paid last year, and the RM 450 belongs to next year.
Electricity: expense = 3,300 − 280 + 360 = RM 3,380. The RM 280 was last year’s cost, and the RM 360 is this year’s cost not yet paid.
The electricity account:
| Debit | RM | Credit | RM |
|---|---|---|---|
| Bank | 3,300 | 1 Jan Balance b/d (accrual) | 280 |
| 31 Dec Balance c/d (accrual) | 360 | 31 Dec Income statement | 3,380 |
| 3,660 | 3,660 | ||
| 1 Jan Balance b/d (accrual) | 360 |
Both sides total RM 3,660. The check is that the expense is the balancing figure and the totals agree.
The mistake to watch for
A common slip is to move the opening balance in the wrong direction, by adding it when it should be subtracted.
Mistaken answer: Electricity expense = 3,300 + 280 + 360 = RM 3,940.
The student treated every balance as an addition.
The correction is to ask what each balance is doing. The RM 280 is last year’s cost paid this year, so it is already inside the RM 3,300 and must come out: 3,300 − 280 + 360 = RM 3,380.
The mistaken answer is RM 560 too high. If an answer looks like cash paid plus both balances, stop and check each one.
Check yourself
Try these on paper, then open each answer.
1. Insurance: cash paid RM 1,800, opening prepayment RM 450, closing prepayment RM 600. Find the expense.
Show answer
1,800 + 450 − 600 = RM 1,650.
2. Telephone: the expense is RM 1,540, the opening accrual is RM 120 and the closing accrual is RM 160. Find the cash paid.
Show answer
Cash paid = 1,540 + 120 − 160 = RM 1,500. Check: 1,500 − 120 + 160 = 1,540.
3. Rent: cash paid RM 12,500, opening accrual RM 500, closing prepayment RM 1,000. Find the rent expense.
Show answer
The opening accrual is subtracted because it was last year’s cost. The closing prepayment is subtracted because it belongs to next year. 12,500 − 500 − 1,000 = RM 11,000.
Where this leads next
Try everything together in the accruals and prepayments practice set. If you are comfortable with this method, the next big topic is receivables and allowances. The double-entry and ledger trainer is useful for testing ledger layouts.
Our teachers can listen to how you explain each balance in online one-to-one Accounting tuition, which tells them quickly whether the rule is clear or only memorised.