Prepayments

[saad25]

Hi,

Can someone shed some light on the below situation and accounting for it.

Rental Invoice is received for a full year in advance. Payment is to be made in 4 installments. How do we account for this in terms of the invoice, prepayments,etc.

Thanks!

 

[bklynboy]

You recognize rent expense over the period you occupy the property. So if you are paying this over 4 installments, each installment covers 3 months. You credit cash for amount paid, debit expense for 1/3 of the invoice and debit prepaid rent for 2/3 rent. In next month you debit rent expense for another 1/3 and credit prepaid rent. Same for third month. Next quarterly bill you start the cycle over.

 

[saad25]

Hi,

Thanks for this.... but if we have received the invoice for the full year and paid for only 3 months ( first payment) how do we recognise the rest of the invoice? we cannot record it under prepayments as we have only paid 3 months in advance for now? Please see example below:


Invoice received 01st Jan'12- 1,200,000
Payment made 01st Jan'12- 300,000

Next payments to be made on 1st April'12, 1st July & 1st Oct'12 by post dated cheques...

Hope I am able to clarify my question. Thanks!

 

[bklynboy]

You said you are only paying 3 months at a time as required under the invoice. If so the fact that the invoice also lists the full year rent is irrelevent as you are contractually liable to only pay 3 months at a time. You only recognize a liability for rent due and payable - in this case what is due is 3 months at a time.

As an example, lets say I rent a premise and have a 1 year lease, I am required to pay monthly. I dont recognize a liability for the whole lease day 1 but recognize my liability each month I owe rent. Same in your case - you have a 1 year invoice but pay each quarter. Hope this is clear.

 

[saad25]

Excellent!!!!! thanks!! We would only recognise the 3 months liability at a time......

 

[internal auditor]

Dear,
When you make a payment and it's not due at that date then you must record it as prepayment e.g. Prepayment Debit & Cash/Banks Credit and gradually when it becomes due you should adjust it e.g. Particular expense debit and Prepayments credit.

I hope it's clear to you.

Regards,
Manzoor ahmed