How to spread a prepayment month by month
A bill paid in advance is used up a month at a time. Keep a prepayments schedule and post the journal that releases each month's share.
In this room: 3 tasks, 8 questions
- Paid now, used later2 questions. You post entries to T-accounts and work out a figure.
- Releasing it each month3 questions. You work out a figure, pick the right answer and put steps in order.
- The prepayments schedule3 questions. You find the mistake in a table, write a journal entry and work out a figure.
A prepayment is money paid for something the business will use later, such as a year of cover or service paid at the start. Until it is used, the business is owed it, so it is an asset.
Beckside Joinery now makes accounts every month, not only at the year end. A whole year's payment cannot be charged to the one month it was paid in.
On 1 April Beckside pays £2,160 for a machinery service contract that runs for 12 months, to 31 March. The whole payment goes to Prepaid expenses.
Answer the questions below
1 more question follows in this task.
At the end of each month, one month's share moves from the asset to the expense. This is called releasing the prepayment.
- Debit the expense account, here Machinery servicing: the cost of the month
- Credit Prepaid expenses: less of the contract is left to use
Every prepayment is listed on a prepayments schedule, so that none is forgotten. After the last release nothing is left, and the whole payment has become an expense, a month at a time.
Answer the questions below
2 more questions follow in this task.
A prepayments schedule lists every prepayment: what was paid, when it started and how much is left. Its total should equal the balance on Prepaid expenses.
| Cost | Expense account | Paid | Runs from |
|---|---|---|---|
| Machinery service contract | Machinery servicing | 2,160.00 | 1 April |
| Trade association membership | Subscriptions | 360.00 | 1 January |
| Website hosting | Website costs | 600.00 | 1 March |
Answer the questions below
2 more questions follow in this task.