Introduction

About Prepayments

Prepayments are actual payments made in advance. A prepayment journal lets you process the Purchase Invoice or Bank Payment as normal but spread the cost over several future periods. This is to recognise that the expense will be incurred across multiple periods, preventing 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, allocate it to a Balance Sheet Prepayment Account, and complete payment, without interrupting the Supplier's Credit Term conditions.
2. Set up Periodic or monthly charges and spread them evenly to each period of:
   • the respective General Ledger Expense and Cost Centre Account(s).
   • 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 from a nominated point in time.

See:

Prepayments (7.6) - AIQ Academy

Prepayment System Accounts

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 can all have their own Prepayment Accounts.

Step One: Set up the individual GL Accounts in the General Ledger

Set up a GL Account for Prepayment purposes. 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 the GL Grid. 

See:

How do I Setup and Maintain General Ledger Accounts?‍ 

Step Two: Allocate the GL Account as a Prepayment Account

1. In the blue Banner, 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.

Processing a Supplier Invoice

You can process a Supplier Invoice using either the Purchase Invoice or Purchases Batch Invoice screen  (see Creating Purchase Item Invoices (Unordered Process) or Creating Batch Purchase Invoices‍)‍. If you receive a Supplier Invoice in advance of them providing the goods or services:

1. Enter the Supplier Invoice as normal to a General Ledger Prepayment Balance Sheet Account. In this example, we received an Invoice from Onyx Insurance Brokers regarding Insurance Fees for the Financial Year 2018 and posted it to a Balance Sheet Prepayment Account called Insurance Prepayments (6210).
   
   
    
2. Click Post Batch and proceed, as normal, to the system's Payment function.

Processing a Bank Payment

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.

Spreading and Posting the Costs against several Periods

In the General Ledger Grid, any positive prepayment amount in the GL Group column will be in respect of:

• a new Supplier Invoice or Bank Payment.
• a Prepayment Cancellation which has not yet been spread and needs to be as soon as possible.

Spreading a prepayment

1. In the blue banner, go to General > GL Prepayments to open the Prepayment Journal Entry screen.
   
   
   
   
    
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. 
   • 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. 
   • 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.
3. Click Select Transactions to Spread to open the Transactions to Spread screen.
4. Choose from a list of Bank Payments (BP) and Purchase Invoices (PI) transactions that have been posted to the selected prepayment system account and that have not been previously spread across periods up to the Date selected. The selected transactions will then drive the total net prepayment amount to spread. You can select one or more of these transactions for spreading by ticking in the Selected column. Click Save to return to the previous screen. 
   
   
   
   
    
5. In the Prepayment Journal Entry screen complete the following where relevant:
   • Total Net Payment To Be Spread: This is the total prepayment amount available to spread across periods and GL accounts based on the chosen prepayment account and filtered by the transaction/s 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 account and BI Codes.
   • GL Cost Account, Cost Centre: Select one or more.
   • DR Amount: Enter the appropriate monthly charge amount against each GL Account and Cost Centre until you have reached the Total to Spread per Period.
6. 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.
   
   
   
   

Using Reverse to cancel a prepayment

You can only cancel Prepayments for Open Periods. If you want to cancel a Prepayment in its entirety and some of the periods have been closed, then you must first open the Closed Periods. 

If all the Periods are Open, cancel the Prepayment by using the Reverse facility. Against the relevant transactions, go to Actions > Reverse. In the example below, the use of the Annexe premises stopped from July 2018 onwards. 

See: 

How do I Re-open Financial Periods?‍ 

Using a Bank Payment to Cancel a Prepayment

You can partially cancel a Prepayment. 

1. Choose the amount that you want to cancel and quote the Prepayment Balance Sheet GL Code for the following cases:
   
   
   • If the funds will return to your Bank Account, prepare a Debit Note.
     
     
   • If the Prepayment Transaction was by way of Bank Payment, prepare a Bank Sundry Receipt. 
   • If the funds will not return to your Bank Account, prepare a Debit Journal.
2. Go to General > GL Prepayments. 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 Prepayments

Changing the Value of the First or 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. 
 

In the blue banner, go to General > Transaction Browser. Use the Transaction Browser to 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

Cancel some or all the Prepayment rather than using the Transaction Browser and attempting to amend each one of the spread Prepayment Transactions, Contras, and Balance Sheet postings. Then enter a revised Prepayment.

Foreign Currency Prepayments

Prepare and Post the Invoice as normal. 

• 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.

Viewing Prepayments and Cancellations

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.

In the blue banner, go to General > Transaction Browser. 

Monthly Reporting

Prepayment Balance Sheet postings and their corresponding Expense account Postings are spread annually (or longer) 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.