USA Prepaid

[CharlieN234]

Hi Everyone,

I am having difficulty defending the logical and accepted accounting practice with prepaid transactions with my boss and would like to consult with some of you out there hopefully some of you will convince my theory is either not acceptable or accepted at some level where I can leverage.

Below is my question:

If an invoice is dated in the current period, however the actual expense to be consumed with the future mont, how does the transaction should be recorded in the current mont in accounting?

My theory:

If a transaction for example if an invoice has a current period, but the expense does actually consume in the future month. Technically, if I close the current month than should I consider the entry be entered in its current period with PREPAID as the allocation entry and would have to justify the entry to expense when the cost actually occurs?

Scinarios: I was told that it is a wrong entry, and told that the invoice doesn't have to be accounted in the current period unless the cost hit the cash account in the current month. Am I over thinking? I see where it's coming but somehow I'm not too convincing and why is that, can someone help me?

 

[Radek Výtisk]

Hi Charlie,

I assume that your accounting is accrual-based. In this case, if I understand it correctly, you received an invoice let's say in December, dated December. Now, there is a question, whether you paid that invoice in December or not. If you did pay it in December, but the expense it relates to are to be incurred only in January, you should book Debit Prepaid expenses / Credit Cash. However, in case you did not pay the invoice in December, I wouldn't book it in December at all, unless there are some rules regarding for example VAT on that invoice that would make you book it already in December (just for reference, in my country, VAT must be included in the monthly VAT return based on the month when the invoice was received, not according to the month of it's actual date).

Hope this helps, in case of any questions let me know