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?

Bookkeeping and tax tips

We are committed to keeping your information safe. Read our Privacy Policy to find out more.

Related Definitions

Are you an accountant or bookkeeper?

Find out more about FreeAgent for your practice.