Example of prepayment

Example of prepayment

Prepayment is asset for the organization because benefit has not yet received by the organization. Item which has deliver benefit to the organization are charges as expenses but item which has not yet delivered benefit to the organization is recorded as asset.

Example # 1

ABC Co paid a rent of 2 years amount 20,000 for current year and next year. Rent of $ 10,000 is expenses because the benefit has been received by the organization where the remaining $ 10,000 is as asset because the benefit is to be received in next year.

Date	Particulars	Dr	Cr
31 Dec ,2014	Rent a/c	10,000
31 Dec ,2014	Pre paid rent a/c	10,000
	Cash a/c		20,000

Example # 2

ABC & CO paid an advance salary to its employee at the year of amounting 120,000. The advance salary will be recorded as asset because the worker will perform duties in next year. It means organization will receive benefit in next year. This year transaction will be recorded as under

Date	Particulars	Dr	Cr
31 Dec ,2014	Advance Salary a/c	120,000
31 Dec ,2014	Cash a/c		120,000

Next year when the duties will be performed by the employee the advance salary will be adjusted.

Date	Particulars	Dr	Cr
31 Jan ,2015	Salary a/c	120,000
31 Jan ,2015	Advance Salary a/c		120,000