Authorship
the accrued revenue. A new balance for £1000 is listed for rent accrued, showing £1000 is still owed to Café Noir, it is a current asset.
What are prepayments?
A prepayment is a payment made in advance of the accounting period to which it refers. This could be an annual insurance premium paid in advance of receiving the cover. Sometimes a business receives a prepayment in advance of a transaction. This could be a builder receiving a deposit or advance payment before work begins.
If a prepayment is made an adjustment to the trial balance is required. We must firstly calculate how much of the prepayment relates to the current trading period. For example if a firm paid £500 on July 1st for motor insurance, only 6 months of the premium would relate to the current trading period. Therefore, half the premium, £250, must be subtracted from the insurance expenses for that year in order to give a ‘true and fair view’ of the firm’s financial circumstances.
Accounting for prepayments:
Copy the example of Hornchurch Metal Products. The trial balance at 31 December 2000 showed £1,200 spent on insurance expenses. However, the premium was paid on 1 February 2000 for one year’s cover. Therefore, one month of the total premium was for the next trading period. Therefore had been a prepayment of £100.