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Prepaid expenditure can be defined as the portion of a payment that relates to the value of services to be received in future accounting periods which will gradually expire or be used up over time. The assessment of prepaid expenditure is an important requirement of accrual accounting. Prepaid expenditure is included as an asset in the financial statements prepared by the University.
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Example: Payment of $400 is made on 1 October for the annual registration and compulsory third party insurance for a University motor vehicle. |
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Prepaid expenditure (value of service to be received and reported in next year's financial results). |
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9 months |
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x $400 = $300 |
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12 months |
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Current expenditure (value of service received and reported in the current year's financial results) |
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3 months |
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x $400 = $100 |
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12 months |
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Total expenditure = $400 |
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The main types of prepaid expenditure incurred by the University include: |
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- Hire charges, lease agreements, rentals; |
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- Insurance premiums generally;
- Maintenance agreements; |
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- Motor vehicle registrations; - Service contracts generally; and - Subscriptions for serials and other items. |
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F&BS process Journal Entries to record expenses paid in advance for the entire University.
Consider the situation where the University processes a payment of $800 on 1 October for a service to be provided for one year.
DR Expense $800
CR Creditors Control $800
A cheque is drawn and the payment is made.
DR Creditors Control $800
CR Bank $800
At the end of the year the proportion of the payment that relates to the next year
$600 ($800 x 9 months/12 months)
is processed as a reversing adjusting journal entry.
DR Prepaid expenditure $600
CR Expense $600
The amount remaining in the prepaid expenditure asset account and the amount of the expense account at the end of the financial year, or other accounting period, can then be ascertained for financial reporting purposes. The amount remaining in the prepaid expenditure asset account is carried forward to the next accounting period.
