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I. OBJECTIVE
1. To provide guidelines on the accounting policy for pre-payments
II. DEFINITION OF TERMS
1. Prepaid Insurance – It includes insurances paid in advances.
2. Prepaid Rent – It includes rent paid to lessor in advance.
3. Prepaid Supplies – It includes supplies purchased such as office, warehouse, commissary and store supplies
III. GENERAL POLICIES
The inventory shall be recognized if and only if:
• It is probable that future economic benefit will flow to the entity
• It can be measured reliably
Prepayments are expenses paid in advance. They are actually economic resources which are the current assets of a business that are expected to be used up or consumed during the accounting period of the business.
Prepayment is presented as single line item in the balance sheet and is part of current assets:
• Prepaid Insurance
* An adjusting entry is made at the end of the month to recognize the insurance expense
• Prepaid Rent
* An adjusting entry is made at the end of the month to recognize a rent expense
• Prepaid Supplies
* An adjusting entry is made at the end of the month to recognize the supplies expense
IV. PROCEDURE FLOWCHART
Flowchart Title
(Not Applicable)
V. REFERENCE/INTERFACE PROCESS
Document Title
(Not Applicable)
VI. FORMS AND RECORDS
Form Title
(Not Applicable)
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