A prepayment question please. If an electricity bill of £300 we received in Jun11 for months of Jun, Jul and Aug11, I think I should enter £300 as prepayment in Jun, then do a monthly journal in Jun debit electricity and credit prepayment. But the problem is if we paid £100 instalment for the £300 bill by credit card in Jun, what can i do with this credit card payment? If i enter £100 payment via bank, then I have to use the electricity code, then will I enter into the electricity code of £100 twice for the same month? Once is debit side from journal, the other is via bank payment? I know probably I got confused somewhere, will anyone enlighten me please! Thanks.
Sorry, I am just making up a prepayment case without really thinking through whether it makes sense or not. They did not pay the full bill in Jun, 3 seperate payments of £100 are made in Jun, Jul and Aug11. Thanks
In your example if you post the invoice to the purchase ledger you would then post the monthly credit card payments against the invoice until it was paid off.
So the invoice would Cr Creditors and Dr Prepayments The monthly payment would CR Bank Dr Creditors
Thanks Mark, what you said is very correct. I think the simpliest answer is just to pay monthly instalment of £100 against prepayment of the invoice. My brain is frozen today!
Would you not CR Creditors and DR Electricity, then each month CR Bank and DR Creditors. I'm not sure where the prepayment is coming in here. It's not a prepayment. Its a bill for 3 months, paid over 3 months. It just so happens that it's received at the beginning of the period. You don't post an electricity bill to the purchase ledger.
I was assuming that whilst the example wasn't completely accurate in that you don't normally get an electricity in advance, I was using the principle that for an invoice where the service is billed in advance ie Non Domestic Rates, Subscription, I would Cr Creditors and Dr Prepayments with the invoice, Cr Bank and Dr Creditors with the monthly payment and then Cr Prepayments and Dr Expense with the equal monthly amount from the invoice. I always post all utility bills to purchase ledger, just my way of doing things
My understanding was that a prepayment is when you actually physically make a payment before the service is used. For example an annual subscription is paid at the beginning of the year. Therefore the prepayment is an asset.
In the example given it's not really a prepayment, as it's not being pre paid. Its just that the invoice is arriving at the beginning of the period, but is being paid monthly, therefore paid as it is used.
Sorry Kris, I deleted it. I started wondering whether prepayments are more accurately described, as "prepayments and deferred expenses", which might help explain why invoices posted to the ledger in advance of the current period sit as a current asset, which as you said seems a little illogical.
If the above is correct, then I think it's a better explanation than the one I initially posted and wanted to double check first (which I haven't).
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Tony
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