Your prepayments may comprise of various types – to give two examples, those you require for certain orders made and those that your clients have bought for an example in the form of gift cards.
To follow up those two types in accounting, the approach is a bit different. The prepayment made for a certain order is undoubtedly going to be used up. That’s the first bit of thing that’s different. In your accounting initially you account for the prepayment with: Continue reading
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.
- 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?
- You got something you’ll be using at a later date – a promise to receive service used over a period of time in future.
- 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.
- 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
In case you receive prepayments on a regular basis (i.e. gift cards etc.) there’s a high chance that the prepayments balance on your balance sheet is increasing and is most probably a considerable amount. I’m pretty sure that you have been wondering about what to do with this balance.
Generally when you receive prepayments, you on one hand increase “Cash and cash equivalents”, but you also take a liability called “Prepayments received” to your balance sheet. This liability cannot be turned into an income not until actual service has been provided.
However, what to do when you either know definitely (you keep record of all prepayments received and their date) or in case you do not keep specific track on the prepayments and have just a hunch that some of those are years old.
Just recently we received a question about prepayments. Now imagine a situation – you received a prepayment from your client (either invoiced separately or charged as extra to compensate on extra services (like commercial space etc.), but due to whatever reasons you were unable to provide the actual service during the period or at year end. This in result means that you essentially received the money, but you didn’t do what you promised for it.
Yes, to start off, it’s not a nice place to be in, but it happens. It’s life and it’s business. Now, as we said, be the reasons what they may, we have the accounting for it to worry about. Normally, when you receive prepayments from your clients (say a 100 in our example), you should account them as follows: