Prepaid expense spanning multiple years.

[Michael Barnes]

I've seen a few articles on setting up prepaid Expense accounts and then using memorised journals to spread the cost over the period covered by the expense but I have a few questions I hope someone may be able to answer.

1, some sites say to use 'other asset' for the Prepaid Expense account, others say it should be 'other current asset', which would be the most appropriate to use? I'm assuming 'Other current asset.

2, All the articles I've read say that you 'must' ensure the Prepaid Expense account is £0.00 by the end of the accrual period so I assume as my reporting year is April 1 to March 31st this means it must be zero by March 31st?

3, If the Prepaid Expense account must be zero by the end of the year how would you account for expenses which span multiple accounting periods? For example, I have a reseller hosting account which I pay for in November in advance for 1 year, I want to divide this by 12 months but this spans 2 accounting periods. How would I account for this so the prepaid account is zero as of 31st March?

4, I guess the last question is, Is it worth it for expenses which are only a couple of hundred £'s? Although I guess this is really dependent on the revenue of the business. As a new start-up my revenue is quite low so even a couple of hundred £'s extra in one month can have a big affect on my reports.

Thanks for your time

 

[MyAccountantOnline]

I would generally charge the expense to the appropriate expense account and post a year end journal for the prepaid amount.

 

[Philip Hoyle]

2, All the articles I've read say that you 'must' ensure the Prepaid Expense account is £0.00 by the end of the accrual period so I assume as my reporting year is April 1 to March 31st this means it must be zero by March 31st?

Accrual period, not accounting period, you're getting the two mixed up. If you have something that spans 2 years, then the accrual period is 2 years, the accrual has to be zero at the end of 2 years not one. Nothing wrong with having an accrual balance at the end of an accounting period.

 

[Philip Hoyle]

2, All the articles I've read say that you 'must' ensure the Prepaid Expense account is £0.00 by the end of the accrual period so I assume as my reporting year is April 1 to March 31st this means it must be zero by March 31st?

Accrual period, not accounting period, you're getting the two mixed up. If you have something that spans 2 years, then the accrual period is 2 years, the accrual has to be zero at the end of 2 years not one. Nothing wrong with having an accrual balance at the end of an accounting period.

 

[Michael Barnes]

Accrual period, not accounting period, you're getting the two mixed up. If you have something that spans 2 years, then the accrual period is 2 years, the accrual has to be zero at the end of 2 years not one. Nothing wrong with having an accrual balance at the end of an accounting period.

Thanks for the clarification, much appreciated.

 

[Michael Barnes]

Accrual period, not accounting period, you're getting the two mixed up. If you have something that spans 2 years, then the accrual period is 2 years, the accrual has to be zero at the end of 2 years not one. Nothing wrong with having an accrual balance at the end of an accounting period.

Thanks for the clarification, much appreciated.

 

[TimCaprica]

As no one has done a full answer:

1) I'd use an account called 'Prepayments' which will be one of many 'Current Asset' accounts. Other Current Assets could also include things like Rent deposits. You ideally want to keep the Prepayments separate to that sort of thing.

2) As mentioned above the Prepayment 'must' be zero by the end of the accrual period not accounting period. So let's say you prepay rent to cover the period of 1st October 2015 to 31 December 2015. You would want the prepayment to be £0 by 31 December 2015.

3) As above, it doesn't have to be £0 by year end.

4) I think you've answered your own question there. Normally people don't bother with prepayments unless they make a material difference to the accounts. By the sounds of it they would in your case. I'd still suggest you ignore any prepayments of less than £100 (just treat it as any normal expense).

 

[TimCaprica]

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