Prepayment Agreement
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How to fill out Prepayment Agreement?
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FAQ
A prepaid expense is a type of asset on the balance sheet that results from a business making advanced payments for goods or services to be received in the future. Prepaid expenses are initially recorded as assets, but their value is expensed over time onto the income statement.
The initial journal entry for prepaid rent is a debit to prepaid rent and a credit to cash. These are both asset accounts and do not increase or decrease a company's balance sheet. Recall that prepaid expenses are considered an asset because they provide future economic benefits to the company.
Most prepaid expenses appear on the balance sheet as a current asset, unless the expense is not to be incurred until after 12 months, which is a rarity.
From the perspective of the seller, a prepayment is recorded as a credit to a liability account for prepayments, and a debit to the cash account. When the prepaid customer order is eventually shipped, the prepayment account is debited and the relevant revenue account is credited.
To recognize prepaid expenses that become actual expenses, use adjusting entries. As you use the prepaid item, decrease your Prepaid Expense account and increase your actual Expense account. To do this, debit your Expense account and credit your Prepaid Expense account. This creates a prepaid expense adjusting entry.
The prepayment agreement sets out the terms on which the prepayment is made, including any conditions which must first be satisfied, such as any security or credit support that the supplier must provide.
The following list shows common prepaid expenses examples: Rent (paying for a commercial space before using it) Small business insurance policies. Equipment you pay for before use. Salaries (unless you run payroll in arrears)
Prepayments are amounts paid for by a business in advance of the goods or services being received later on. Any payment made in advance can be considered a prepayment. A prepayment is not dissimilar to a deposit, but generally falls under a more set time period for fulfillment of the goods or service purchased.