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 |
£1568/14×2= £224 |
| Feb 20X6 – Feb 20X6- Office 2 |
£1,287 |
£1287/13×1=99 |
| Total prepayments adjustment needed |
|
£224+£99=£323 |
|
Account name |
Amount |
Dr/ |
|
Prepayments |
323 |
Dr |
|
Business rates |
323 |
Cr |