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Sir, I know prepayment is an asset (for the person who paid) and it increases the profits.
But logically, how?
As an example: Let’s say if our current profits are $10,000 then we made a prepayment of $2000 then will it increase our profits up to $12,000? or will remain $10,000?
I’m not getting the reason.
It will increase prepayments or assets and will reduce the cash with the same amount but the reduction of cash has no link with profits.Can you please explain ?
If the prepayment had been made during the year but had not been recorded, then recording it will increase the profit.
The expense account is debited with the total cash paid. If some of the cash is a payment for next year (i.e. a prepayment) then only the balance of the cash paid is an expense for this year.
Have you watched my free lectures on prepayments and accruals?
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