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Chapter 12

1.2 Prepaid expenditure

A prepayment arises when expenses of the business, relating to the following year,
have been paid in advance prior to the year end. This is usually the case with rent.

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.

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