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.

General approach in such cases is simple – if they are more than 1 year old, the probability that they would be used / redeemed, is close to zero. Considering this the best solution in this case is just to recognize them as income and keep the prepayment balance just for those payments, which are just about a year old maximum.

In that way you keep your prepayments balance in reasonable amount, you more or less know what they are for and you also increase your income. Isn’t it the best?