Advances and Prepayments
Also called: Prepaid Expenses, Advance to Supplier
Money paid before you receive the goods or service, such as supplier advances or yearly insurance paid up front. On the Balance Sheet.
In detail
Advances and Prepayments holds money the company has paid before receiving the goods or service: a deposit to a supplier against a future order, a year's insurance premium paid in Shrawan, rent paid for months ahead. The asset is used up over time, so each month the part consumed is released to the expense account by Journal Entry, which keeps the Profit and Loss even instead of showing one heavy month. Supplier advances made by Payment Entry are later adjusted against the Purchase Invoice when it arrives. A prepayment left here after the service has been used overstates assets and understates expense, which the auditor will adjust and the IRD may question.
Formula
Balance = Amounts paid in advance - Amounts released to expense or adjusted against invoices; monthly release = Prepaid amount / Months covered.
Accounting entry
| Account | Debit | Credit |
|---|---|---|
| Advances and Prepayments | Rs 1,20,000 | |
| Bank Account (rename me) | Rs 1,20,000 |
How to record it in BRAccount
- 01Go to Invoicing > Journal Entry > New dated the payment; debit Advances and Prepayments, credit the bank.
- 02Submit. The entry above posts for a full year's insurance paid in Shrawan 2083.
- 03Each month end, post a Journal Entry debiting Insurance Rs 10,000 and crediting this account.
- 04For a supplier advance, use Payments > Payment Entry with Party Type Supplier and this account as the advance account.
- 05Open the ledger from the chart; the balance should fall to zero by Ashadh end for a yearly premium.
When to use it
Post by Payment Entry for supplier advances, or Journal Entry for prepaid rent and insurance. Release monthly to the expense account.
Example from the demo books
Dr Advances and Prepayments Rs 1,20,000, Cr Bank Account Rs 1,20,000 for a full year's insurance paid in Shrawan 2083.