Prepayments in sales and expenses refer to the practice of paying for goods or services in advance before they are actually delivered or consumed. These prepayments can impact a company's financial statements and accounting practices in the following ways:
Prepaid expenses: Prepaid expenses are costs that have been paid for but have not yet been consumed or used. They are initially recorded as assets because the company still possesses the value of the prepayment. Over time, as the expenses are incurred (e.g., rent, subscriptions), they are gradually recognized as expenses for the periods in which the value is used.
For example, if a company pays for one year of rent but has only used two months of it, the two months are recorded as expenses, while the remaining ten months are treated as assets until each subsequent month is incurred.
One of Tyms' functions is to ensure that these prepayments are accurately reflected in financial reports, including the balance sheet and trial balance.
Here is a brief guide on how to record prepaid expenses on Tyms:
- Record expenses for this specific transaction.
- Under the payment section in the record sales page, check the box which says “This is a prepaid expense”
- Enter the number (in months) this prepaid expense will spread across.
