What is a prepayment

What is a prepayment?
Prepayment

Prepayment – What is a Prepayment?

To prepay means to pay for something in advance. In accountancy, a prepayment is where you have paid for goods or services in advance of receiving the benefit they will bring to the business.

Prepayment Example 1

Suppose you have paid car insurance of £500 on the first of January 2015, and this cover runs from the first of January 2015 to the 31st of December 2015.

If you were preparing accounts on the 31st of March 2015, you would have paid for all of the car insurance, but only received the benefit of three months of insurance (January to March). The remaining nine month (April to December) are the amount that are to be prepaid. The prepayment on 31 March 2015 would be 9/12 x £500 = £375.

Prepayment Example 2

Suppose you have paid rent of £10,000 on the 30th of September 2015 which covers 1 October 2015 to 30 September 2016.

If you were preparing accounts on the 31st of March 2015, you would have paid for all of the rent, but only received the benefit of six months of occupancy (October to March). The remaining six months (April to September) are the amount that are to be prepaid. The prepayment on 31 March 2016 would be 6/12 x £10,00 = £5,000.

Prepayment Example 3

Suppose you have paid rent of £10,000 on the 31st of December 2015 which covers 1 January 2016 to 31 December 2016.

If you were preparing accounts on the 31st of March 2016, you would have paid for all of the rent, but only received the benefit of three months of occupancy (January to March). The remaining nine month (April to December) are the amount that are to be prepaid. The prepayment on 31 March 2016 would be 9/12 x £10,00 = £7,500.

Prepayment Example 4

Suppose you have paid rent of £10,000 on the 31st of December 2015 which covers 1 January 2016 to 31 December 2016.

If you were preparing accounts on the 30th of June 2016, you would have paid for all of the rent, but only received the benefit of six months of occupancy (January to June). The remaining six month (July to December) are the amount that are to be prepaid. The prepayment on 30 June 2016 would be 6/12 x £10,00 = £5,000.

Prepayment Example 5

Suppose you have paid rent of £10,000 on the 31st of December 2015 which covers 1 January 2016 to 31 December 2016.

If you were preparing accounts on the 30th of September 2016, you would have paid for all of the rent, but only received the benefit of nine months of occupancy (January to September). The remaining three month (October to December) are the amount that are to be prepaid. The prepayment on 30th September 2016 would be 3/12 x £10,00 = £2,500.

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What are accruals and prepayments?

Now you’ve read about prepayments, find out about accruals.


The aim of these pages is to help you understand your accounts by explaining some of the commonly used accountancy terms.  If you are looking for accountants in Sutton Coldfield, Walsall, Birmingham, or the rest of the West Midlands to help with your accounts and tax returns please contact me to see how I can help.