What is a prepayment?
Definition of a prepayment
A prepayment is money that you've paid in advance for a business cost.
Example of a prepayment
More information about prepayments
When you pay for something in advance, then at the point when you pay for it, you would put it on your business's balance sheet as a prepayment. A prepayment is a current asset of the business. At the time when you actually receive the service, the cost moves from the balance sheet to the profit and loss account, and becomes a day-to-day running cost of the business.
If your business is registered for VAT, then you always account for prepayments net of VAT.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.