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Prepayments

WHAT ARE PREPAYMENTS?

Prepayments are services you have paid for in advance or a service you paid for that will span a long period of time i.e. The charge does not relate to just one month, but to many months and ensures that the charge is reflected in the month it is due.

EXAMPLE OF PREPAYMENTS:
Car Insurance: You pay for it all in one month, but it covers you for 12 months. So rather than having one big charge in a single month, you charge 1/12th of it to each month and spread the cost over the year.

Car Insurance example:

Billed Monthly charge Prepaid
January 1,200 100 1,100
February 100 1,000
March 100 900
April 100 800
May 100 700
June 100 600
July 100 500
August 100 400
September 100 300
October 100 200
November 100 100
December 100 0

So in this example the €1,200 has been charged as €100 per month with an amount always being held in a prepaid account until it goes to zero.
Your Profit & Loss a/c for every month would show only a charge of €100 per month for Car Insurance and not €1,200 for January and 0 for every other month.