Prepayments

As the prefix "pre" implies which means advance. Prepayments is advance payments.

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

Assets Elements

Classification of Asset

Generally, assets are classified as follows:

• Current
• Non-Current 

Assets are classified as Current Assets when any of the following criteria are met:

1. It is cash or cash equivalent which is not restricted for current use.
2. It is expected to be realized, or is held for sale or consumption in the normal course of the business' operating cycle.
3. It is held for trading purposes or for the short-term and expected to be realized within twelve months of the SFP date.

Operating cycle means the time between the acquisition of materials entering into a process and its realization in cash or an instrument that is readily convertible into cash.

Non-Current Assets are those assets which do not meet the criteria of current assets.

Generally, they include those tangible and intangible assets of a long-term nature (usually, more than 12 months from SFP date).

Examples of Assets Elements

Current Assets Elements

• Cash - 
• Accounts Receivable
• Notes Receivable
• Accrued Interest Receivable
• Inventories
• Prepaid Expenses

Non-Current Assets Elements

• Land
• Building
• Furniture and Fixture
• Equipment

Contra-Valuation Accounts

• Allowance for Doubtful Accounts
• Accumulated Depreciation

Normal Balance : Debit

Asset accounts has normal debit balances.

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