Accountancy/Prepayments
Prepayments, also called deferrals, result from cash payment preceding an expense or revenue recognition. The most common example of a prepaid expense is unearned revenue.
Often, businesses pay for services from which they have not yet benefited e.g. rent is often paid in advance.
The double entry for a prepayment is:
| Date | Description | Post Ref. |
Dr | Cr | |
|---|---|---|---|---|---|
| 2005 Feb |
1 | Prepaid Rent (Asset) | 50 | ||
| Cash (Asset) | 50 | ||||
Later when the rent is actually due the entry is:
| Date | Description | Post Ref. |
Dr | Cr | |
|---|---|---|---|---|---|
| 2005 Mar |
1 | Rent (Expense) | 50 | ||
| Prepaid Rent (Asset) | 50 | ||||