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

[Axeem]

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.

 

[kirby]

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

 

[Axeem]

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.

 

[wave]

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!

 

[Axeem]

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.

 

[wave]

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..

 

[Fidget]

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.

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.

 

[kirby]

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

 

[wave]

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.

May I ask regarding this purchase drawdown please, how you would account for it once you receive?

 

[wave]

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

what you mean by Def Exp Asset please?

 

[Axeem]

what you mean by Def Exp Asset please?

Hi wave. I found this on internet.

https://www.accountingtools.com/articles/what-is-a-deferred-expense.html

 

[Axeem]

Hi

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

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.

 

[wave]

Hi wave. I found this on internet.

https://www.accountingtools.com/articles/what-is-a-deferred-expense.html

I see, different terminology! it is Prepaid expense, thats what we call it.

 

[Axeem]

I see, different terminology! it is Prepaid expense, thats what we call it.

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.

 

[wave]

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.

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]

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!

But its good, we learn from each other makes you think! thanks for sharing