A business pays a full year of insurance in July. The bank balance falls by EUR 1,200, yet only six months of cover have been used by 31 December. Booking the full payment as July's expense would overstate the 2026 expense by EUR 600 in this example and leave no asset for the unused cover. The payment date is easy to see; the service period requires a closer look at the policy.
I am Dmitri Schmidt, head of AccRes. This example shows how an Estonian company using accrual accounting can separate payment from expense, post a monthly release and reconcile the prepayment at year end. It assumes ordinary business cover running from 1 July 2026 to 30 June 2027, evenly supplied, with full calendar months. It does not decide VAT recovery, income-tax treatment or insurance-specific rules. A mid-month start or early cancellation needs its own calculation.
Read the coverage dates before booking the expense
Under Accounting Act § 5(2)–(3), accrual accounting follows the transaction rather than the cash movement. Adjusting entries establish the correct period's income and expenses. Section 16(6) matches expenses to the period of related income. Here, the policy covers business activity from 1 July 2026 through 30 June 2027.
Keep the invoice and policy together. Check when cover starts and ends, what is covered, and whether early termination changes the amount recoverable. An invoice date or payment due date alone cannot establish how much cover remains unused. We assume the EUR 1,200 is the amount allocated in this illustration.
Work through the twelve monthly entries
Divide EUR 1,200 by 12 full months: EUR 100 per month. On payment, recognise a EUR 1,200 prepayment and reduce bank by the same amount. At each month-end, reduce the prepayment by EUR 100 and recognise EUR 100 of expense. These are illustrative account movements; the Act does not prescribe a universal account number for the policy.
July to December is six months, so 6 × EUR 100 = EUR 600 is 2026 expense. The other six months, January to June, belong to 2027. Straight-line allocation works only because we assumed even cover. An uneven service pattern or a separately priced one-off component calls for a different split.
Reconcile the 31 December balance
The closing prepayment is EUR 1,200 − EUR 600 = EUR 600. Match the ledger balance to the remaining six months of the actual policy. If the software has already charged all EUR 1,200 to expense, correct the period by moving EUR 600 into prepayments; there is no second cash payment.
Accounting Act §§ 4 and 6 require documented, recorded transactions. Retain the invoice, policy, bank evidence and allocation schedule. If the policy is amended, refunded or cancelled, recalculate the remaining balance from the changed contract rather than continuing the original automatic release.
Keep accounting timing separate from tax questions
This example answers which accounting periods receive the service expense. It does not establish whether a purchase is business-related, whether input VAT is recoverable, or the tax treatment of a specific policy. Those require a separate review of the transaction and tax documents.
Section 16(4) permits simplified accounting for immaterial items. A small prepayment may therefore not need twelve manual entries if a consistent policy still gives a fair report. This example assumes EUR 1,200 is material enough for this company to allocate across the periods.
I put the actual policy start and end dates in the allocation schedule. 'Annual fee' on an invoice does not prove that cover starts on the invoice date.
For a service paid a year ahead, begin with the period of cover. In this example, EUR 600 of the EUR 1,200 payment is 2026 expense and EUR 600 is an asset for cover still to come in 2027. The monthly releases and closing balance should trace back to one policy and one allocation schedule.
If prepayment balances no longer match your contracts, contact AccRes. We can reconcile entries before the annual report.