Prepayments
A prepayment is an asset representing the portion of a payment or recorded invoice that relates to goods or services to be received after the reporting date. Apportion the cost between the current period and the future benefit. The invoice may remain unpaid: a prepayment asset and a payable can coexist. Recognise expense as the benefit is received.
Worked example
An entity records a $1,000 five-month insurance invoice in payables on 1 September. At 30 September, one month is expense ($200) and four months are prepaid ($800), even if the invoice has not been paid. If the whole amount was initially expensed, debit prepayments $800 and credit insurance expense $800.
Common mistake
Do not require cash payment before recognising the prepayment, or treat the unpaid supplier invoice as cancelling the future-service asset.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | F1 | Direct | July 2027–August 2028 |
| ACCA | F2 | Supporting | July 2027–August 2028 |
| ACCA | FA | Direct | September 2026–June 2027 |
| ACCA | K1 | Direct | July 2027–August 2028 |
| CIMA | BA3 | Direct | Official assessment-window verification pending |
| FIA | FFA | Direct | September 2026–June 2027 |
Related terms
Also called: Prepaid expenses