Prepayments

Prepayments represent the advance payments to vendors and third parties against receipt of goods/ services expected to be received in future. Prepayments are expensed out evenly or as per the pattern of use over the period for which the prepayment was made.

Example:

On July 1, 2019 a company pays $ 15,000 as its factory rent for the next 12 months in advance, the payment will be recorded as prepaid rent at the time of payment.

Description

Debit

Credit

Prepaid Rent

15,000

 

Bank Account

 

15,000

The Company year-end is December 31, 2019 at which date only 6 months of the rental period would have expired. Consequently, the rental amount relating to six months period will be expensed out through the following accounting entry.

Description

Debit

Credit

Rent expense

7,500

 

             Prepaid Rent

 

7,500

The remaining USD 7,500 in Prepaid Rent account will be carried to Balance Sheet as at December 31, 2019.

One thought on “Prepayments”

Related Post