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What are Prepayments and How to Manage Them

What are prepayments?

Prepayments are specific payments that have already been made. However, the benefits of the payments aren’t taken until the end of the period or the year. Prepayments are paid in advance business; they are made before the goods or services are received. Any payment no matter how large or small it is, is made in advance is considered to be a prepayment. Prepayments are similar to deposits, but they tend to fall under a specific time period. This time period indicates when the goods or services need to be delivered.

prepayments
Some specific types of goods or services need to be paid in advance before the goods or services are provided. In this article, you will find out how to manage prepayments. (© unsplash.com)

Management of Prepayments

Some specific types of goods or services need to be paid in advance before the goods or services are provided. The payment, in this case, is a prepayment. Occasionally some expenses are also paid in the form of a prepayment a typical expense is the cost of insurance that is required due to the very nature of the services or goods provided.

Prepayments in Accounting

Goods and services can be prepaid, however, if they haven’t been received by the end of the financial year they will appear as prepayments on the . This is as opposed to appearing as costs in the profit and loss account.

This amount of money that has been prepared will be subtracted from a balance sheet. This money will be added to the costs of the profit and loss. In this way, the costs that are involved will then be charged to the right accounting period.

Registering Prepayments

The nature of the business you run you may find work with prepayments regularly. Accounting systems can handle payments differently and this affects when the expense has been recorded in the business’ financial records.

Accrual accounting

Payments are typically recorded when the financial event takes place, rather than when the money changes hands. A prepayment for an expense, for example, would be entered when the billing takes place and not when the payment has been made.

Cash accounting

The payment is recorded as soon as it has been made. A payment for an expense, for example, will be registered in the period that it occurs regardless of when the goods or services are received.

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