12/28/2023 0 Comments Prepaid expenses on balance sheetTo put it simply, sellers will record prepayments as liabilities, while buyers will record them as assets. For all other expenses, they should charge them to expenses although they have not yet consumed the items entirely. To avoid such a situation from happening, they should only use the prepaid expense accounts if the amount of prepayment is greater than a fixed threshold amount. In some cases, the buyers may overuse their prepaid expense accounts, and thus, they need to keep track of a lot of small prepaid items. When it has consumed the prepaid expense fully, it should debit an expense account related to that transaction and credit the prepaid expense account. From the buyer’s perspective, it will record the prepayment by debiting its prepaid expense account and crediting its cash account. ![]() Typically, the seller will not receive prepayments often, and therefore it can track those amounts easily. When it has delivered the products that the client has ordered, it will debit the prepayment account and credit the revenue account related to that deal. ![]() From the seller’s perspective, it will record the prepayment by debiting its cash account and crediting its liability account for prepayment (Also see Accounting – Understanding Credit and Debit in the Business).We will look into accounting for prepayments from the seller’s and the buyer’s perspectives: the buyer wants the seller to give them a priority for an order.the seller does not want to extend credit to its buyer.the buyer uses the cash basis to record its business transactions and wishes to record the expense early, so it pays the seller early. ![]() Three situations cause prepayments to happen: Prepayments are the payments that the selling companies have received from their buyers before they deliver the products or provide the services to their buyers.
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