Prepayments – What are prepayments?
Definition: Prepayments are payments which have been made already, but the benefits of which are not yet taken by the company.
Prepayments are amounts paid for by the business in advance of the goods or services being received at the period or year end.
These amounts need to be deducted from expenses in order to show a true picture in the Profit and Loss account.
Management of prepayments
Goods and services may be prepaid. If they have not been received by the end of the financial year the amount prepaid will appear in the Balance Sheet as prepayments and not as costs in the Profit and Loss account.
This amount will then be subtracted from the balance sheet and added to the costs of the P&L. This way the costs involved will be charged to the correct accounting period.