I’ll be honest with you on this one – even I’ve forgotten that I had accounted some expenses first off into prepayments. What I mean by this is that I had thought I’d spread those expenses over the period of time I’m using the service and with doing the initial entry I forgot to make those entries every month as I just forgot I had thought about distributing those expenses at all. I thought I had just expensed them once and for all at the time I made the payment to the supplier.  Continue reading →

Accounting for prepayments is somewhat of a hassle. There’s a little bit more to it than just one entry for the expense and one for the payment made to the supplier.

1. Initially you recognize that you made a payment through crediting your bank or cash balance. This is where you gave up something to get something in return. Now what was it that you got?
2. You got something you’ll be using at a later date – a promise to receive service used over a period of time in future.
3. This promise is something you account on your balance sheet as an asset – a prepayment made for this something you got. You’re accounting for this promise that you’ll “collect” when the time is right.
4. When with your credit you showed that you paid for this with cash or bank transfer, then with your debit you’ll show what you got in return. Your accounting entry will show that you gave away money so you’d receive something in future.  Continue reading →

You’ve prepaid something for a longer period in time, let’s say your quarterly rent and now you’re thinking whether to distribute this expense over the period you paid for or not. I’ll give you reasons why you shouldn’t do it.  Continue reading →