Prepayments

Question 1

What is a prepayment?

Answer 1

Prepayments are payments made in the current financial year, relating to goods or services received in the next financial year.

Question 2

Name 3 examples of a prepayment?

Answer 2

Insurance premiums, magazine subscriptions, or rental costs

Question 3

What section of the balance sheet can prepayments be found?

Answer 3

Under ‘Assets’ because on the day the balance sheet is prepared, the part of the amount paid, which applied to the following year was effectively owned to the business.

Question 4

Prepayment Scenario

A company’s financial year runs from 1 April to 31 March. In Jan the business pays an annual insurance premium of £600, covering the period 1 Jan - 31 December.
In the accounts for the year ending 31 March, only part of the premium paid will be recorded as an expense for the current financial year. What will be the calculation to work out the current expense and the prepayment?

Answer 4

£600 (total annual premium) divided by 12 (months) = £50 per month.

Expense for current financial year:
£50 x 3 (months - Jan to March) = £150.

Prepayment amount for next financial year:
9 (months - April to December) x £50 (monthly rate).
= £450