Here's the scenario. A business with a December 2013 year end records the following telephone bill in the Purchase Ledger in December 2013 (VAT ignored):
Q/E November 2013 calls £3,000
Q/E February 2014 line rentals £300
They record an accrual for December calls of £1,000. Also a prepayment of £200 for line rental.
OK so far?
What if I told you that the telephone bill remained unpaid at 31 December?
Would you still call the prepayment entry a prepayment? If not what would you call it and where would you post it?
Prepayment doesn't mean it's actually been paid yet. It's the invoice that is prepaid (not the cash payment) if it's a bill for 3 months you don't want 3 months bill in one month, you debit prepayments and credit the expense account to take out the cost so you only showing 1 month on the first month, then 2 months in the second month and 3 months in the third (in the YTD part of your P/L.
hope that makes sense
Thanks.
Stuart
I agree Stuart. The result in the Balance Sheet shows us a debit of £200 for the prepayment, thus recognising the unused part of the line rental as an asset and a credit in trade creditors, recognising the liability of the outstanding invoice.
I think in that thread I had originally missed the point that the invoice had been posted but hopefully recognised this in my next post. I agree it is a tricky concept for the layman, the 'pre-payment' word suggests it has been paid rather than just recognising the expense for the upcoming periods. Like I said in that post I tend to post the monthly payments rather than the invoice. You get the answer spot on under TOTA regulations!!
-- Edited by RobH on Friday 5th of September 2014 01:36:12 PM
