Prepaid expense amortization

Incrementally charge the cost of a prepaid expense over its period of use.

Overview

Amortization allows you to spread out the costs for the use of a long-term asset over the expected period the asset will provide value.  This method is used for prepaid expenses like rent, insurance, and taxes where the costs need to be scheduled to post across accounting months.

The prepaid expense amortization function in Accountability facilitates this process.  The amortization schedule for prepaid expenses can be defined within a supplier invoice or a journal. 

Set-up

Navigate to Accounting>General Ledger>General Ledger Accounts and define a Prepayment Control Account for every prepaid expense account. 

Steps 

Create a prepayment amortization schedule from a supplier invoice 

1. Navigate to Accounting>Payables>Supplier Invoices to create an amortization schedule for a supplier invoice, click on the Prepayment icon for the prepaid expense line item. 
   
   
2. This launches the Prepayment Amortization page.  The header will show the Supplier, Supplier Invoice No.,  Expense Account for the invoice line item, and the corresponding Prepayment Control account mapped to it.  Enter an optional Description.  This will Description will be carried over to the prepayment and amortization journals. 
3. Enter the number of months and click Go.  You will be prompted to Select the First Date. The system will automatically create the schedule based on the number of months entered. 
   
   
4. The system will distribute the total invoice amount evenly across months.  In the case where the amortized total does not equal the supplier invoice total, you can allocate the remaining amount to any of the months, i.e. last month. 
5. Save the amortization schedule.

5. When you approve the invoice, the system will create a Prepayment Journal and a Journal for each amortized amount. 

Create a prepayment amortization schedule through a journal entry

Similar to recording a supplier invoice, you can enter a journal entry to record the prepayment expense. 

1. Navigate to Accounting>General Ledger>Journals and Create a New Journal.
2. On the Journal line item, click the Prepayment icon to launch the Prepayment Amortization page. 

Postings for Prepayment Expense

Scenario:

An invoice for an insurance premium is paid on September 1st. The invoice total is $12,000.00 and the premium is for 3 months, starting on October 1st. The expense is recorded on September 1st as: 

Based on the Prepayment schedule, the system will also make the following entries: