Wish you didn't have to prepay for anything, but it can be hard to avoid sometimes. Prepaids are typically thrown out by your underwriters and can put a strain on your cash position. But the last thing you want to do is expense the entire amount you paid at once. You should at least make sure you're properly amortizing the expense across the appropriate periods.
It's wise to keep a detailed prepaid schedule separately in a spreadsheet to help you with this process. Try to keep it simple too. You don't need a separate prepaid account for every prepaid transaction. You may decide to limit the detail to type, like; prepaid insurance and prepaid service agreements. But remember, this should always reconcile to the trial balance!
Now, download the template below and tune into the overview below!
Overview of template:
Columns B and C: Pretty self explanatory here. All you'll need to do is input the vendor name and a description of the charges.
Column D: This will be the total amount paid in the current period. REMEMBER: IT'S PREPAID WHEN YOU ACTUALLY PAY IT. IF YOU HAVEN'T PAID IT YET, IT'S NOT PREPAID.
Columns E and F: Input the coverage period here. Start of the coverage will be in column E and the end of the coverage will be in column F.
Column H (Formula): Calculates the number of months covered by the service or insurance agreement.
Column I: Input the total months covered in the current period here. If coverage is from 7/1/22 to 6/30/22, and it's 12/31/22, you will have six months (from 7/1-12/31) to expense.
Column J (Formula): Percentage of total cost to be allocated in the current period.
Column K (Formula): The amount to expense for the current period. What I mean by current period here is the total amount for the six months from 7/1-12/31. Ultimately, your income statement should show an expense of $50,000 by 12/31/21 related to this prepayment.
Column L (Formula): If you close out your financial statements on a monthly basis, you can use this column to determine how much to expense on a monthly basis.
Column N (Formula): Finally, the ending balance. This should reflect the total amount remaining in your prepaid account. In the example provided, you will have $50,000 on your balance sheet as a prepaid asset and the remaining $50,000 will be expensed in 2023.
Hope that all made sense!