Prepayments - The Book-keepers Forum (UK)

Nimac · Senior Member

Prepayments

TSBooks · Newbie

You would need to debit the income account in the P&L and credit the prepaid income account in the balance sheet.

For example:
£3000 sponsorship received for a 3 year deal. Assume initial posting was debit bank and credit sponsorship income in the P&L.

To account for the prepaid income:
Debit - sponsorship income (P/L) £2000 (£3000/3 = £1000 per year)
Credit - prepaid income (B/S) £2000

Following year: need to show £1000 sponsorship income for the year
Debit - prepaid income (B/S) £1000
Credit - sponsorship income (P/L) £1000

You would do the same posting in the final year leaving a nil balance in the prepaid income a/c.

Hope this makes sense.

Tina

Nimac · Senior Member

Thanks Tina.

That makes sense and i'll give it a go.

AccountantsCircle · Senior Member

I just wanted to correct some confusion that may be caused by the terminology used here.

Prepayments relate to expenses, as income is not "paid". The terms commonly used for income are either "Deferred Income" or "Unearned Income".

It's also not just each year you may have to look at doing the journal, but also at the start & end of each reporting period.

John Gesch
The Accountants Circle
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-- Edited by AccountantsCircle at 19:19, 2008-08-06