Overview of Prepayments
Some Of the nominals and ledgers used in this topic may be different to those in your chart of accounts.
Prepayments are required when goods or services have already been paid for but the full benefit of these goods or services is realised in the future. For example, an annual insurance policy could be paid as a lump sum, but the policy typically covers 12 monthly periods. In this circumstance, you need to ensure that the cost is correctly reflected across the accounting periods during which the benefit is received. This is achieved by posting a prepayment.
Before posting any prepayment documents, it is essential to check that all the accounting periods within the prepayment time frame exist, and have an security role of PERIOD.8 or less.
If this is not the case, prepayments may be posted to future periods or to the Register period, which can be time consuming to rectify.
If you experience any problems with prepayments as a consequence of accounting periods being closed or having the wrong access level, please see Dealing with Prepayments Posted to the Wrong Period.
In the following prepayment example, an annual insurance policy costs £12,000 and covers a 12 month period. The invoice would typically be prepaid as follows:
| Period 1 | £1,000 |
| Period 2 | £1,000 |
| Period 3 | £1,000 |
| Period 4 | £1,000 |
| Period 5 | £1,000 |
| Period 6 | £1,000 |
| Period 7 | £1,000 |
| Period 8 | £1,000 |
| Period 9 | £1,000 |
| Period 10 | £1,000 |
| Period 11 | £1,000 |
| Period 12 | £1,000 |
| Total | £12,000 |
Prepayments should be entered at the time the applicable document is posted (in most cases, an invoice) to ensure that the system calculates, then allocates the correct expenditure to the applicable accounting period. This is achieved by entering prepayment start and end dates in the applicable document
Prepayments can also be recorded in Purchase Credit documents (to ensure that any applicable prepayments are reversed where a supplier credit note is received)
What Happens When the Document is Posted
Prepayments are posted as reversing journals. Once the applicable document has been posted, the system automatically posts two types of document:
PB – Prepayment Move to Balance Sheet document
A
PM – Prepayment Movement document:
Based on the prepayment start and end dates previously entered, the system calculates the number of accounting periods within the time frame, together with the amount that should be allocated to each accounting period. A
Each of these documents reverses the expenditure from the balance sheet nominal back to the expense nominal and account.
Also see: