Dealing with prepayments

Prepaid expenses are sums paid to suppliers that on your own balance sheet accumulate under one or a few balances all containing the word “prepayment” or “prepaid”. It’s to refer that those amounts are to be your future expenses and at this point they’re just amounts of money you’ve already paid to your suppliers. They’re your assets just in different form than money. 

Now please note that paying is one thing, keeping record of them entirely different. You pay a sum; you debit the paid amount under “prepaid expenses” or whatever the name of the account on your balance sheet is and what you also need to do is keep a detailed record of all your prepayments. By “detailed” what we mean by every amount paid with all relevant information – dates, periods and conditions etc.

Prepaid expenses are not just amounts stockpiled onto the account, but also to be taken off from the balance sheet account and accounted to expenses on the income statement. The only way to really do those entries is to ensure you’ve got all the right information and you’ve scheduled for your entries in advance.