What are prepayments in accounting?
Prepayments are payments made in advance for goods or services a company will receive in a later period, such as annual insurance, software subscriptions or rent paid quarterly in advance. The amount is recorded as an asset on the balance sheet and released to the profit and loss account month by month over the period the payment covers.
Also calledprepaid expensesprepaid costs
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- Recorded as
- Current asset
- Released
- Monthly over the period covered
- Category
- ERP and general ledger
How prepayments work
When a 12,000 annual software subscription is paid in January, it is posted to a prepayments asset account rather than to expenses. Each month, 1,000 is released to the software expense line, so the cost matches the months that benefit from it and the remaining asset falls to zero by December. Finance teams keep a prepayment schedule listing each item, its start and end dates and the monthly release, and reconcile the balance sheet account to the schedule at each month-end. Many ledgers create the release journals automatically from the schedule; some close and AI tools spot invoices that cover future periods and propose a prepayment when the bill is posted. Accrued income, the asset side of accruals, is often reported with prepayments in UK accounts.
Common questions
Are prepayments an asset or an expense?+
An asset when paid, because the company has paid for something it has not yet received. It becomes an expense as each period passes, through monthly release journals.
What is a prepayment schedule?+
A list of prepaid items with the amount, the period covered and the monthly release. Its total should agree with the prepayments balance in the ledger at each month-end.
What is the US term for prepayments?+
Prepaid expenses. The accounting is the same: the payment is held as an asset and recognised as an expense over the period it covers.
Software used to manage prepayments
NetSuiteCloud ERP for mid-market companies outgrowing basic accounting.Profile →
Sage IntacctMulti-entity cloud financials with dimensional reporting.Profile →
XeroCloud accounting for small businesses with a large app ecosystem.Profile →
FloQastClose management software automating reconciliations for mid-market teams.Profile →
NumericAI-powered close management with variance detection and audit prep.Profile →
RilletAI ERP for SaaS companies automating revenue recognition and close.Profile →Part of Accountio’s accounting technology coverage · Glossary
