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Chapter 9

1.2 Prepaid expenditure

A prepayment arises when expenses of the business entity, relating to the following
year, have been paid in advance prior to the year end. This could be the case, for
example with rent or insurance, which are often paid in advance.

In this case, it is necessary to remove the extra expense relevant to the following
year and create a corresponding statement of financial position asset (called a
prepayment) as follows:

Debit Prepayment account (SOFP)

Credit Expense account (SOPL)

A prepayment therefore increases profit

Illustrations and further practice

Now try question TYU 2 from Chapter 10 of the Study Text.

Tutor notes guidance – discussion points

Take students through Illustration 2 from Chapter 10 of the Study Text.

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