Prepayments are actual Payments (or, more accurately, the processing and payment of Supplier billings) made in respect of Goods or Services which the Company has received in advance of the Company's ability to deploy the goods or services rendered. This option facilitates the posting of normal Supplier Invoices (or other remittances) and their subsequent posting to Prepayment Balance Sheet Journals for Goods or Services not yet received or deployed and the spreading of the Cost impact over a number of Periods during which the Costs are, or will be, deemed to have occurred and therefore taken to the P & L. In other words, it allows for the proper accounting of an advance Payment to a Supplier. For example, if you receive a Supplier Invoice in advance in respect of say, Annual Office Insurance, you can process and pay the Invoice as normal, but spread the costs over several relevant future periods. Other examples might include Annual Rental in advance, charges for Computer Maintenance, Annual Software Licences, Annual Membership Fees, and so on. "Provisions", and "Accruals" in respect of other anticipated costs which, without verification by way of Invoices or Sundry Bank Payments, are dealt with in an other facility within the system. The process involved here is two step;
(i) The processing (and allocation to a Balance Sheet Prepayment Account) and subsequent payment of the Supplier's Invoice or Charge without interruption of the Supplier's Credit Term conditions.
(i) The setup and even spreading of the periodic or monthly charges to each period of the respective General Ledger Expense and Cost Centre Account (s) and, the corresponding monthly contra transactions in the Balance Sheet Prepayment Account.
Both actions can be carried out independently of each other - but should, in reality, occur as nearly as possible (timewise) to each other.
If it should prove necessary, you can also subsequently Cancel, from a nominated point in time, remaining Prepayment transactions.
2. Prepayment System Accounts:
You can set up as many Balance Sheet Prepayment Accounts in your General Ledger as you wish in order to differentiate between different types for subsequent Balance Sheet query and analysis reporting. For example, you might wish to set up a Prepayment Account for all Insurances, and a different one for Rents and Rates, Equipment Leases, Retainers and Advances, etc. You must first set up the individual GL Accounts in the General Ledger (refer to the Article "How do I Setup and Maintain General Ledger Accounts") and then record them in Company Setup >> Codes Maintenance >> System Accounts;
Click on "Add New System Account" which will bring up the following window;
Choose "Prepayment Account" from the "Account Type" Drop Down. Next, choose the associated Balance Sheet Account which you have set up to manage these particular Prepayments from the "Linked GL Account" Drop Down, followed by "Save".
In addition, when setting up the General Ledger Prepayment Accounts, if you assign a Group Code to the Account (in this example "PR" for "Prepayments") then you will be able to group them and query them in this Grid;
3. Processing a Supplier Invoice:
Should you receive a Supplier Invoice in advance of the goods or services to be provided, the first step is to input and post the Supplier Invoice as normal. In this instance, however, rather than post the details to an Expense Account (one or more) in the GL, the posting is made to a General Ledger Prepayment Balance Sheet Account. You can do this through the Purchase Invoice facilities. Please refer to the relevant documentation. In this example, we are going to use the Purchases Batch Invoice screen;
Here we are posting an Invoice received from Onyx Insurance Brokers in regard to Insurance Fees relating to the Financial Year 2018 and posting it to a Balance Sheet Prepayment Account called "Insurance Prepayments" (6210). After clicking on "Post Batch", you can now proceed, as normal, to the system's Payment function anytime afterwards and discharge the liability.
4. Processing a Bank Payment:
In the event a Supplier is not involved, you can, instead, raise a Sundry Bank Payment transaction:
Again, post the Bank Payment to the Balance Sheet Prepayment Account rather than the Expense Account.
5. Spreading and Posting the Costs against several Periods:
In the General Ledger Grid, If you see an amount here (with no Date Filter switched on), then this will be in respect of a new Supplier Invoice (or Bank Payment) or a Prepayment Cancellation (see 6. below) which has not yet been Spread and which should be attended to as soon as possible.
In order to effect the Spreading, proceed to the GL Prepayments option which you will find here;
On selecting this option you will be presented with the following screen;
Begin by selecting the appropriate Balance Sheet Prepayment Account from the Drop Down. Note that only entries set up in the Prepayment Account Types in Prepayment System Accounts will be displayed in this Drop Down (See 2. above). Next enter a Description of the Charge to be Posted to the Prepayment Account. Ticking the "Default Description to Each Line" check box will cause this Line to be replicated on each P & L Posting in the lower half of the window.
Key in the Start Date of the Journal (i.e. the Date from which the subsequently generated Expense Postings and Prepayment Contras are to start) and an appropriate Journal Reference. N.B. This Date must be on or later than the Invoice Date of the Supplier Invoice (or Bank Payment) Posting (3. above). The start period no. for subsequent spreading is presented.
Next, Click on "Select Transactions to Spread" which will bring up the following Window;
This will bring up a list of Invoice (or Bank Payment) transactions (see 3. and 4. above) which have been posted to this Prepayment Account prior to the Date selected above (Start Date) and which have not yet been spread. You can then Select one or more of these transactions for Spreading by ticking the "Selected" tick box. Click on "Save" to return to the previous screen.
The "Total Net Payment To Be Spread" is now calculated and presented. Next, move to the field entitled "Spread Across:". Here you should enter the number of Periods you wish to spread the "Total Net Payment" across beginning from the Period No. presented in the upper portion of the screen. When the "Process" button is entered, the transactions generated here will be the monthly Prepayment Journals.
To generate the corresponding monthly P & L Expense transactions, move to the next portion of the screen where you select the GL Cost Account (one or more) and Cost Centres (if required). Enter the appropriate amount to be charged each month against each GL Account and Cost Centre until you have arrived at the "Total to Spread per Period".
Click on "Process" to complete the action.
You will now see, in the Transaction Browser, the Current and Forward Prepayments in the Prepayment Account;
And the Monthly Charges in the Expense Accounts;
6. Cancelling Prepayments:
You can also Cancel Forward Prepayments. For Example, in the foregoing example, you might have vacated the Annexe premises from July 2018 onwards.
N.B. You can only Cancel Prepayments for Open Periods. If you wish to Cancel a Prepayment in its entirety and some of the Periods have been Closed then you must first Open the Closed Periods. Refer to the Article "How do I Re-Open Financial Periods". If all the Periods are "Open" you cancel the Prepayment by using the "Reverse" facility;
You can also partially cancel a Prepayment; Prepare a Debit Note, or, in the case where the Prepayment Transaction was by way of Bank Payment, prepare a Bank Sundry Receipt (if the funds are returned into your Bank Account), or, if not, a Debit Journal in the amount that you wish to Cancel and quoting the Prepayment Balance Sheet GL Code (same as detailed in 3. and 4. above). You should then enter the GL Prepayments program and use this transaction to Spread the Cancelling Amount across the number of Periods you require and starting at the Date quoted in the upper part of the GL Prepayment Screen. Again the date of the Debit Note must be on or earlier than this Date. Follow the instructions detailed in 5. above.
7. Amending Prepayments:
After Spreading the Prepayment evenly across the chosen number of Periods using the functionality described in 5. above, in some cases you might want to change the value in the first period because you want to treat it as a part period and similarly with the end period. Use the Transaction Browser to effect such changes and be sure to ensure that the sum of the period values after modification equals the total of the original Prepayment - otherwise there will be a residual amount left in the Prepayment Account at the end of the spread.
Should you need to amend a Prepayment in total for whatever reason, it's advisable to Cancel some or all of the Prepayment rather than calling up the Transaction Browser and attempting to amend each and every one of the spread Prepayment Transactions, Contras and Balance Sheet postings. Instead, Cancel the Prepayment (where possible) and then enter a revised Prepayment.
8. Foreign Currency Prepayments:
The Currency Code on the Suppliers Account or the Bank Account will determine if the Supplier Invoice or Sundry Bank Payment is in a Foreign Currency. Prepare and Post the Invoice as normal. The Exchange Rate used will be that currently set up in the Currency Table and the Base Currency equivalent will be presented at the bottom of the Invoice or Sundry Bank Payment screen. It is this Base Currency Amount which will be used when generating the spread transactions against the Prepayment and Expense Accounts. The exchange rate used will be constant.
9. Reviewing Prepayments and Cancellations:
You can review any previously entered Prepayments which have been posted and spread from here in the Transaction Browser. And similarly, any Prepayment Cancellation or Reversals you might subsequently have made.
10. Monthly Reporting:
Even though the Prepayment Balance Sheet postings and their corresponding Expense account Postings are spread annually (or longer) in advance, it is the Period Number selected in the Report Filters that determine which and how many of these Postings will be included in the chosen Report. Any postings with a Period No. higher than that selected for the Report will not be included either in the Current Period values or the Year to Date values.