In practice, small business made one lump sum prepayment or downpayment for purchases or services accross a certain period. For instance, the business may entered into insurance contract to insure its asset for a period of 12 months.
From accounting perspective, the amount prepaid should be expensed over the period of servie covered. To illustrate, the 12-month insurance premium paid should be expensed off over a period of 12 months. What would be the accounting treatment then?
Assuming Company XYZ entered into insurance contract to insure its inventory. Total insurance premium paid is US$12,000.
Upon payment of insurance, the Company passed the following entries:
Dr. Prepayment (B/S- Asset)12,000
Cr. Cash 12,000
(Being prepayment to insurer for insurance contract)
At month end, the following entry will be passed to recognise the insurance expense
Dr. Insurance expense (P/L)1,000 (12,000/ 12)
Cr. Prepayment 1,000
(Being utilisation of monthly insurance expense)
At the end of 12 months, the prepayment accounted will be fully utilised.
From accounting perspective, the amount prepaid should be expensed over the period of servie covered. To illustrate, the 12-month insurance premium paid should be expensed off over a period of 12 months. What would be the accounting treatment then?
Assuming Company XYZ entered into insurance contract to insure its inventory. Total insurance premium paid is US$12,000.
Upon payment of insurance, the Company passed the following entries:
Dr. Prepayment (B/S- Asset)12,000
Cr. Cash 12,000
(Being prepayment to insurer for insurance contract)
At month end, the following entry will be passed to recognise the insurance expense
Dr. Insurance expense (P/L)1,000 (12,000/ 12)
Cr. Prepayment 1,000
(Being utilisation of monthly insurance expense)
At the end of 12 months, the prepayment accounted will be fully utilised.
