Accounting Adjustment – Prepayment in two different reporting period

Hi everyone,

I am an ACCA student, at the final stage to complete the certification.

I just start to work in the finance department in Ireland as an accountant. At work happen an issue with the recording of an adjustment in two financial periods.

Two invoices billed from the same client have not been recorded: 3,000 Euro issued on 1st August 2019 and 4,500 Euro issued on 1st August 2020. The first invoice covers 5 months in 2019 and 7 months in 2020. The second one covers 5 months in 2020 and 7 months in 2021.

So the manager told me to pass an adjustment for 2019 and 2020 (adjustment for 2021 not needed). As it gets it quite confusing, the manager shows me how to do it:

2019 (1st Invoice)

Dr Prepayment 1,250 Euro
Dr Adm. Cost 2019 1,750 Euro
Cr Trade payables (3,000) Euro

2020 (1st Invoice)

Dr Retained Earnings 1,750 Euro
Cr Prepayment (1,750) Euro

2020 (2nd Invoice)

Dr Prepayment 1,875 Euro
Dr Adm. cost 2020 2,625 Euro
Cr Trade payables (4,500) Euro

Really simple to pass the first adjustment for the first year of invoice issued. However, I found quite confused the financial year 2020. I think it’s wrong, or maybe I did not get it, but the Prepayment Closing Balance in 2020 is Dr 75 Euro. Shouldn’t be the closing balance of Dr 2,625 Euro, as the Prepayment for 2019 (Dr 1,250 Euro) have been reversed in 2020?

Thank you who will help me to understand.