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In your mind when you do a quick calculation to see if you are making any money this month, you think, Sales 10,000; Cost of sales 6,000; Gross Profit = 4,000; ESB, Phone, stationery, rent, rates = 5,000; loss = 1000, no that's not right, I paid quarterly rent of 1200 so only 400 relates to this month, the rates of 6000 is for the year so only 500 (1/12) relates to this month so I made a loss of 100 instead of 1000, this is prepayments. Taking out costs that don't relate to the current month. 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.
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
| | 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. You dint suffer a charge in your profit and loss account for 1200. 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.
article:100020 (c) Nilsson Denver Ltd 2007 |
