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.
Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.