Service Invoice Received for one year period. Monthly payment scheme. How to record?

Discussion in 'General Accountancy Discussion' started by Axeem, Aug 9, 2018.

  1. Axeem

    Axeem

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    Hi all,
    Cable tv company has issued an invoice covering for one year period. $500x12=6000$

    But as per the agreement, we should pay monthly. What is the accounting treatment for entring invoice and paying monthly payments. Can i book the invoice as prepayment?

    Thanks.
     
    Axeem, Aug 9, 2018
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  2. Axeem

    kirby VIP Member

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    It is not a prepayment unless you actually paid the whole $6,000 right now.
    So when you issue payment monthly just record
    DR Cable tv expense $500
    CR Cash $500
     
    kirby, Aug 9, 2018
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  3. Axeem

    Axeem

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    Hi
    Thanks for the reply. Shouldn’t i record the full year invoice? I have an agreement and i will received a receipt for the $500monthly rental.
     
    Axeem, Aug 9, 2018
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  4. Axeem

    wave

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    If you havent paid and you received the full year invoice then I think the below works (since it is a contractual obligation):
    Dr. Expense
    Cr. AP

    and then each time you make payment:

    Dr AP
    Cr Bank

    Please correct me if I am wrong!
     
    wave, Aug 10, 2018
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  5. Axeem

    Axeem

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    Your answer is understandable. But I’m preparing monthly accounts, so i should consider a method which will proportionate monthly expenses to P&L. As per your J/E, the full year invoice falls to a particular month. When finalizing accounts for audit, auditor will make adjustment if the contract or invoice (covering period) goes beyond the financial year. I wonder what if i add the invoice to a control account and pass journal entries to make arrange payment? Or whatever the procedure which will proportionate monthly.
     
    Axeem, Aug 10, 2018
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  6. Axeem

    wave

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    If you haven't paid but will pay monthly then just record when it comes right? It's like rental for housing.
    Dr. Exp
    Cr bank
    So you have the invoice for the whole year ? And even if the very last month auditor makes adj it will be an accrual so the. Following year will just clear off..
    Sorry I couldn't be of much help..
     
    Last edited: Aug 11, 2018
    wave, Aug 11, 2018
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  7. Axeem

    Fidget VIP Member

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    It would only be a prepayment if you pay the whole invoice in advance.

    We use drawdown purchase orders for this type of situation. A purchase order is raised for the full amount, and then receipted monthly. The point at which it is receipted, is the point that it hits the ledger. And so it goes on each month thereby reducing the full amount of the purchase order month by month until the end of it.
     
    Last edited: Aug 11, 2018
    Fidget, Aug 11, 2018
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  8. Axeem

    kirby VIP Member

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    Hi Axeem
    If the cable contract is non cancelable then yes record the whole contract. If so then record a deferred expense asset and a liability for $6,000. Then as you pay monthly record the expense (dr exp cr cash) and decrease the deferred asset (dr liability cr deferred exp asset)
    But typically you can cancel a cable bill and if so just record expense at time of payment
     
    kirby, Aug 11, 2018
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  9. Axeem

    wave

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    May I ask regarding this purchase drawdown please, how you would account for it once you receive?
     
    wave, Aug 13, 2018
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  10. Axeem

    wave

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    what you mean by Def Exp Asset please?
     
    wave, Aug 13, 2018
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  11. Axeem

    Axeem

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    Axeem, Aug 16, 2018
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  12. Axeem

    Axeem

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    Hi
    Hi Kirby,
    Thanks. This is what i wanted to learn. I have to learn Deferred Expense and Liability A/C’s. I guess your answer will fulfil my requirement.
     
    Axeem, Aug 16, 2018
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  13. Axeem

    wave

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    wave, Aug 16, 2018
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  14. Axeem

    Axeem

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    Prepaid and Deferred has different stories. Prepaid means you have already paid. Cash out.
    Deferred means obligation started. But not paid until the service received.
    In my case above, this is the method i was lookin for.
     
    Axeem, Aug 16, 2018
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  15. Axeem

    wave

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    A deferred expense is also known as a prepaid expense - this line is actually from your link hence I said Prepaid expense, though I didnt have time to read the whole story yet!
     
    wave, Aug 17, 2018
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  16. Axeem

    wave

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    But its good, we learn from each other :) makes you think! thanks for sharing
     
    wave, Aug 17, 2018
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