About Prepayments

Prepayments are actual payments made in advance of receiving goods or services. A prepayment journal lets you process the Purchase Invoice or Bank Payment as normal but spread the cost over future periods. Recognising the expense will be incurred across multiple periods prevents distortion of the P&L.

Examples include:

• Annual insurance bill 
• Annual Rental
• Computer Maintenance
• Annual Software Licenses
• Annual Membership Fees 
   

The prepayment process

Prepayment is a two-step process:

1. Process the Supplier's Invoice or charge and allocate it to a Balance Sheet Prepayment Account, and complete payment, without interrupting the Supplier Credit Term conditions.
2. Set up periodic charges, spread evenly for the required period to:
   • The respective GL Expense and Cost Centre Account.
   • The corresponding monthly contra transactions in the Balance Sheet Prepayment Account.

Although you can carry out both actions independently of each other, they should occur as closely as possible. If necessary, you can later cancel any remaining Prepayment transactions at a nominated point in time.

See:

Prepayments (7.6) - AIQ Academy

To differentiate between different prepayment types during analysis reporting, set up as many Balance Sheet Prepayment Accounts in your General Ledger, as necessary, for example, Insurance, Rent, and Rates, Equipment Leases, or Retainers and Advances.

Step One: Create a GL Account

Set up a GL Account for Prepayment purposes. See Managing General Ledger Accounts for full instructions. If you assign a Group Code (in this example PR for Prepayments) then you will be able to group them and query them in the GL listing grid.

Step Two: Allocate the GL Account as a Prepayment Account

1. Go to Setup > Codes Maintenance > System Accounts.
2. Click Add New System Account to open the Systems Account screen.
3. In the Account Type dropdown, select Prepayment Account. 
4. In the Linked GL Account dropdown, select the associated Balance Sheet Account that you set up in step 1.
5. Click Save.

Supplier Invoices can be processed using either the Purchase Invoice or Purchases Batch Invoice screen. See Creating Purchase Invoices (Non PO Process) or‍ Creating Batch Purchase Invoices‍.

If you receive a Supplier Invoice in advance of their providing the goods or services:

1. Enter the Supplier Invoice as normal against a GL Prepayment Balance Sheet Account. 
2. Post as normal and proceed to the system's Payment function.

If a Supplier is not involved, you can raise a Sundry Bank Payment transaction. See Creating Sundry Bank Payments. Post the Bank Payment to the Balance Sheet Prepayment Account, not the Expense Account.

Prepare and post the Invoice as normal, noting the following:

• The Currency Code on the Supplier or Bank Account determines if a Supplier Invoice or Sundry Bank Payment will be in a Foreign Currency. 
• The Exchange Rate used will be that set up in the Currency Table. The exchange rate will be constant. 
• The Base Currency equivalent will appear at the bottom of the Invoice or Sundry Bank Payment screen. When generating the spread transactions against the Prepayment and Expense Accounts, the system uses this Base Currency Amount.

1. Go to GL > GL Prepayments and select GL Prepayments.
2. Complete the following:
   • Prepayments A/C: In the dropdown, select the appropriate Balance Sheet Prepayment Account. Only Prepayment Accounts appear.
   • Description: In the field, enter a Description of the charge that will be in the Prepayment Account. 
   • Default Description to Each Line: Ticking will copy the description to each line in the lower half of the screen. 
   • Journal Reference: In the field, enter an appropriate Journal Reference. This Date must be on or later than the Invoice Date of the Supplier Invoice (or Bank Payment) Posting. The start period number for subsequent spreading appears.
   • Date: In the field, enter the Start Date of the Journal. This is the Date from which the subsequently generated Expense Postings and Prepayment Contras will start. 
3. Click Select Transactions to Spread to open the Transactions to Spread screen.
4. Use the checkboxes to select from Bank Payments (BP) and Purchase Invoices (PI) that have been posted to the selected prepayment account but have not been spread up to the Date selected. This will determine the total net prepayment amount to spread. Click Save.
5. In the Prepayment Journal Entry screen, complete the following where relevant:
   • Total Net Payment To Be Spread: This is based on the transactions just selected.
   • Spread Across: Enter the number of financial periods that the total net amount should be spread over. The system will then display the period range from and to, based on the start date above and the number of periods.
   • Total to Spread per Period: This is the total amount to be spread per period. This amount can be spread across multiple GL accounts and BI Codes.
6. Complete as many lines as needed:
   • GL Cost Account, BI Code: These can differ per line.
   • DR Amount: Enter the appropriate monthly charge amount against each GL Account and BI Code until you have reached the Total to Spread per Period.
7. Click Process. 

In the Transaction Browser, you will now see the Current and Forward Prepayments in the Prepayment Account, and in the Monthly Charges in the Expense Accounts.

Cancel a Prepayment Using a Bank Payment

1. Create a bank payment for the amount you want to cancel against the Prepayment Balance Sheet GL Account using one of the following:
   • Debit Note if the funds will return to your Bank Account.
   • Bank Sundry Receipt if the Prepayment Transaction was by way of Bank Payment.
   • Debit Journal if the funds will not return to your Bank Account.
2. Go to GL > Journal Manager > GL Prepayments.
3. Use the transaction from step 1 above to spread the Cancelling Amount across the number of Periods you require, following the instructions outlined earlier. 

Amending the First or Year End Period

After spreading the prepayment evenly across the chosen number of periods, in some cases, you might want to change the value in the first or end-period because you want to treat it as a part period. 

Go to GL > Transaction Browser and make the required changes. 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. 

Amending a Prepayment in Total

In some cases, it is better to cancel some, or all the prepayment as described earlier and then enter a revised Prepayment rather than using the Transaction Browser and attempting to amend each of the spread Prepayment Transactions, Contras, and Balance Sheet postings. 

Report Manager

Prepayment Balance Sheet postings and their corresponding Expense Account postings are spread in advance. The Period Number selected in the Report Filters determines which and how many of these postings will appear in the chosen report. Any postings with a Period No. higher than that selected for the report will not appear in either the Current Period values or the Year-to-Date values. 

See 

Using the Report Manager.

Transaction Browser

In the transaction browser, you can view:

• Any previously entered prepayments which have been posted and spread.
• Any prepayment cancellations or reversals you might subsequently have made.

See

Using the Transaction Browser.