Prepayments is advance payments of business expenses which expire through use, consumption or passage of time.
Prepayments may be initially recorded as prepaid assets or prepaid expenses.
Expiration of prepayments happens day-to-day and slowly. And, prepayments' expiration is impractical or unnecessary to record daily recurring entries. That's why its adjustments is recorded before the preparation of financial statements.
Example of business expenses which are prepaid are insurance, rentals, supplies, advertising, etc.
Methods of recording prepayments
Prepayments maybe recorded either of the following:
- Asset Method
- Expense Method
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