There are types of services which require that you make a one-off advance payment for a longer period. Essentially what happens is that you\u2019re charged a fee that grants you access to services for a specific term, like a year for say. Whether it\u2019s financially wise to pay up a bigger amount one-off is one thing, but the accounting for such expenses is pretty strict. By nature expenses should be recognized within the period the benefits are received. As such, these payments should be yes done at the time the invoice has its due date, however the recognition on the financial statements is somewhat longer time wise. <\/p>\n
Once you receive the invoice, your initial entry is as follows: <\/p>\n
Db: Prepaid expenses
\n Cr: Payables to suppliers
\n
\nApart the payment accounting entry, you should also divide the amount over the period the service or benefit is received for. Let\u2019s say that the period is one year, so one amount charged to expenses is going to be one-twelfth of the full amount. Effectively in every month your accounting entry is going to be as follows:<\/p>\n
Db: Expense account 1\/12 of the amount
\n Cr: Prepaid expenses 1\/12 of the amount<\/p>\n
As this is for monthly payment, in 12 months the prepaid expense amount on the balance sheet has decreased to nil. And what\u2019s more, by this time, if it\u2019s a continuous service you need, you\u2019ll receive a new invoice for the next 12 months period. The very same applies if it\u2019s a period of just a quarter etc. As the name of the account says, it\u2019s for future expenses that have already been paid for so just make sure you recognize the initial amount in prepaid expenses and start charging expenses from there. <\/p>\n","protected":false},"excerpt":{"rendered":"
There are types of services which require that you make a one-off advance payment for a longer period. Essentially what happens is that you\u2019re charged a fee that grants you access to services for a specific term, like a year for say. Whether it\u2019s financially wise to pay up a bigger amount one-off is one […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,35],"tags":[],"class_list":["post-2807","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-7-basic-entries"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2807","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=2807"}],"version-history":[{"count":3,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2807\/revisions"}],"predecessor-version":[{"id":2809,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2807\/revisions\/2809"}],"wp:attachment":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=2807"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=2807"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=2807"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}