Prepayments

 

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

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