As a service-based or professional firm in Hawaii or beyond, closing your 2025 books
accurately isn’t just good practice—it’s essential for tax readiness, investor confidence,
and avoiding costly audit surprises. Two of the most common sources of material
misstatements at year-end? Prepaid expenses and accruals.
Get these wrong, and you risk overstating profits, understating liabilities, or triggering IRS
scrutiny. Get them right, and your financial statements reflect the true health of your
business—clean, compliant, and ready for 2026.
At Vertaccount, proper identification and booking of close books accruals 2025 is a core
monthly deliverable. Our Hawaii-based outsourced accounting teams handle these
adjustments flawlessly every month, so you never face a frantic December scramble.
Why Year-End Accruals and Prepaids Trip Up Even Experienced Firms
Under accrual-basis accounting (GAAP), revenue and expenses must be recognized in the period they are earned or incurred—not when cash changes hands.
- Prepaid Expenses: Payments made in advance (e.g., annual insurance, software subscriptions, or rent deposits) that benefit future periods.
- Accruals: Expenses incurred but not yet paid or invoiced (e.g., unpaid utilities, bonuses, professional fees, or unbilled vendor services).
Missing or misclassifying these creates distortions that compound at year-end.
The Real Risks of Getting Accruals and Prepaids Wrong
Incorrect adjustments don’t just create bookkeeping headaches—they carry serious consequences:
Risk | Consequence | Example Impact |
Overstated Profits | Higher tax liability now + potential restatements | Accrued bonuses ignored → 2025 net income overstated by $50K+ |
Understated Liabilities | Misleading balance sheet; bank covenant breaches | Unaccrued vendor invoices → liabilities understated, debt ratios off |
Audit Findings / IRS Scrutiny | Penalties, interest, or disallowed deductions | Material weakness noted → higher audit fees and delayed filings |
Lost Stakeholder Trust | Damaged investor/lender relationships | Restated financials erode credibility |
Nail Your 2025 Close Books Accruals and Prepaids
Follow this proven checklist before December 31:
- Review All Vendor Statements – Look for invoices dated January 2026 that relate to 2025 services.
- Accrue Known Liabilities – Bonuses, commissions, PTO, interest, utilities, property taxes.
- Scan Prepaids Schedule – Identify payments made in 2025 that cover 2026 (insurance, licenses, retainers).
- Calculate Amortization – Expense the 2025 portion of multi-month prepaids; carry forward the balance.
- Reconcile Cut-Off – Confirm no duplicate booking of items paid early January that were accrued.
- Document Everything – Support every accrual with emails, contracts, or calculations for audit trail.
- Reverse in January – Automatically reverse accruals when actual invoices hit.
Pro tip for Hawaii firms: Don’t forget GET (General Excise Tax) on accrued services and properly amortizing Section 179 or bonus depreciation on prepaid assets.
Prepaids vs. Accruals: Quick Comparison Table
Item | Prepaid Expenses | Accrued Expenses (Accruals) |
Timing | Paid now, used later | Incurred now, paid later |
Balance Sheet | Current Asset (Prepaid Expense) | Current Liability (Accrued Liabilities) |
Income Statement Impact | Expense recognized over time | Full expense in current period |
Common Examples | Insurance, rent deposits, annual software | Unpaid salaries, utilities, legal fees |
Year-End Risk | Overstating assets / understating expense | Understating liabilities / overstating profit |
Get Tax-Ready Fast: Use Our Free Tax-Readiness Checklist Tool
Wondering exactly which accruals and prepaids apply to your firm?
Download Vertaccount’s Tax-Readiness Checklist Tool – a free interactive guide that walks Hawaii professional service firms through every common year-end adjustment, flags high-risk items, and even estimates potential tax exposure.
What Our Clients Say
“The Vertaccount Team consistently takes a proactive approach to automating the bulk billing process and streamlining future billing opportunities. Their standard operating procedures are exemplary.”
— Kerrie T.
“Recently discovered a critical IRS error that our payroll service had completely missed, potentially saving us from serious complications. Exceptional attention to detail and goes beyond just processing numbers—actively protects our business interests by catching issues others overlook. Highly recommend for their technical expertise and genuine dedication.”
— David K.
Frequently Asked Questions
Accruals must be booked by your fiscal year-end (December 31 for most firms) to match expenses properly under GAAP and avoid IRS adjustments.
Technically yes under materiality, but repeated small misses compound and often trigger auditor comments. Best practice: accrue everything supported by evidence.
GET is generally due when invoiced or paid—prepaids may accelerate the tax if paid early. Consult your CPA, but proper amortization keeps books clean.
You understate 2025 profit (potentially reducing taxes) but must reverse in 2026, creating higher income then. Intentional over-accrual can raise red flags.
Cash-basis firms generally don’t record accruals or prepaids, but most growing service firms exceed the $29M gross receipts threshold and must switch to accrual for tax purposes.
FASB ASC 606 (Revenue) and ASC 405 (Liabilities) are primary sources. See also IRS Publication 538.
Don’t Leave Your 2025 Close to Chance
You’ve worked hard building your firm—don’t let sloppy accruals or overlooked prepaids create unnecessary risk.
Partner with Vertaccount and get flawless monthly accrual accounting, Hawaii-compliant bookkeeping, and a clean, audit-ready close—every single year.
Schedule your free 2025 close review today and let us show you how clean books feel.
