Accountancy/Prepayments

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Prepayments, also called deferrals, result from cash payment preceding an expense or revenue recognition. The most common example of a prepaid expense is unearned revenue.

Often, businesses pay for services from which they have not yet benefited e.g. rent is often paid in advance.

The double entry for a prepayment is:

Journal  - Page 1
Date Description Post
Ref.
Dr Cr
2005
Feb
1 Prepaid Rent (Asset)   50  
  Cash (Asset)     50

Later when the rent is actually due the entry is:

Journal  - Page 1
Date Description Post
Ref.
Dr Cr
2005
Mar
1 Rent (Expense)   50  
  Prepaid Rent (Asset)     50