Prepayment in reality, small business created one particular lump sum prepayment or down payment for purchases or solutions across a specific period. As an illustration, the business may well put into insurance coverage contract to insure its asset for any period of twelve months.
Through small business accounting point of view, the quantity prepaid really should be expense more than the period of service covered. For instance, the 12-month insurance coverage premium paid really should be expense off more than a period of 12 months. What will be the accounting remedy then?
Assuming Corporation ABC entered into insurance coverage contract to insure its inventory. Total insurance coverage premium paid for is US$12,000.
After payment of insurance coverage, the Corporation passed the following accounting entries:
Debit Prepayment (B/S- Asset)12,000
Credit Cash 12,000
(Getting prepayment to insurer for insurance coverage contract)
At month finish, the following entry might be passed to recognize the insurance coverage expense
Debit Insurance expense (P/L)1,000 (12,000/ 12)
Credit Prepayment 1,000
(Getting utilization of month-to-month insurance coverage expense)
In the finish of one year, the prepayment accounted might be completely utilized of the small business accounting.
