A
prepayment is an amount paid in advance for an expense which relates to an
accounting period after the year end.
In accounting for prepayments, the effect that needs to occur will be to reduce the relevant expenditure in an attempt to account for the transactions which have been overpaid and then to increase the asset in that accounting period, recognising that the business could be owed that amount.
Example:
You
are working on the accounting records of a business for the year ended 31
January 20X7. You are looking at the business rates expense for the year and
this shows payments for the following periods:
Feb
20X6 – Mar 20X7- Office 1 |
£1,568 |
Feb
20X6 – Feb 20X7- Office 2 |
£1,287 |
Calculate the value of the adjustment required
for the business rates account as at 31 January 20X7 and show the journal entry
needed for the relevant adjustment.
Solution:
|
|
Prepayments |
Feb
20X6 – Mar 20X7- Office 1 |
£1,568 |
£1568/14x2= £224 |
Feb
20X6 – Feb 20X6- Office 2 |
£1,287 |
£1287/13x1=99 |
Total
prepayments adjustment needed |
|
£224+£99=£323 |
Account name |
Amount
(£) |
Dr/
Cr |
Prepayments |
323 |
Dr |
Business rates |
323 |
Cr |
Prepayments - YouTube
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