Prepayments deal with accounting for expenditure that covers multiple accounting periods. For example you may pay £12,000 for rent in January to cover the whole year. You would want this to show in your financial accounts as an expense of £1,000/month throughout the year instead of just as £12,000 in January.
The same concept but for money received (Sales) is called Accruals. So if someone pays you for one year of service then you would want to recognise 1/12th of the money each month.
Dealing with Prepayments and Accruals in KashFlow
In most accounting software you need to make a number of Journal entries – this is cumbersome and leaves a lot of room for error. In KashFlow we have tried to automate as much of this as possible. In the example below we will only use the word Prepayment for a Purchase – but the same process applies to Accruals.
For any Purchase Code (ie: Rent) or Sales Code that needs to be treated for prepayments, edit the type by going to
Settings > Purchase Codes > Click on the Purchase Code > Tick “Purchases assigned to this code should be treated as prepayments” > Update Purchase Code
Create your purchases as normal and select the relevant code from the drop-down list.
Running the Report
Then, as often as you like (perhaps monthly or even quarterly) go to the
Reports > General Reports > Prepayments and Accruals.
This report will list all Invoices or Purchases that are:
- Within the date range specified
- Assigned to a Sales/ Purchase Code you have selected to be handled as prepayments
- Have not yet had the prepayment Journal entries created.
At the bottom of the page you will see a form you can use to prepare the Journal entries.
- Start Date – Enter the date you would like to start recognising the revenue from. So if the Invoice was dated December, but it is for services starting from January then you would enter 01/01/20**. If you are processing multiple items and would like to use the respective Invoice date then leave the date field blank.
- Period – Over what period would you like to recognise the revenue or expenditure. So for an Invoice for a year of service, you would enter 12 months.
- Instalments – If you want the revenue or expenditure to show in your account once a month then you would select 12 (or how ever many months you entered for the Period option). Alternatively you might want it done quarterly in which case you would enter 4.
- Nominal Code – Choose the Balance Sheet Code you want the unrecognised revenue or expenditure to appear against. For Sales this would usually be a code called “Accruals”, and for purchases it is “Prepayments”
When you have completed the form just click the Preview Journals button. At this point nothing will have changed in your account, this simply shows you the entries it is about to make.
It is worth noting that it will create Journals dated in the future. So these do not affect your accounts until that point in time is reached. However, it does mean that your Journal numbers will not always be sequential when ordered by date.
If you are happy with the Journal entries shown then click Create Journals.