All 24 Invoice Processing questions
More in Invoice Processing
How is input VAT/sales tax handled on purchase invoices? What is a credit note (credit memo) and how is it processed in AP? How are foreign-currency supplier invoices recorded and revalued? What is a pro forma invoice and how is it treated? How do recurring invoices (e.g., rent, subscriptions) get processed efficiently? How are utility and telecom invoices with variable amounts controlled? How do you account for invoices received after period-end for goods/services already received (accruals)? What is the GR/IR (Goods Received/Invoice Received) clearing account and how is it reconciled? How do you measure and improve AP invoice processing efficiency? What internal controls mitigate fraud risk in invoice processing?
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Accounts Payable & Receivable › Invoice Processing

How are prepayments to suppliers accounted for?

Intermediate

Answer

A prepayment (advance) to a supplier is recorded as an asset (prepaid expense/advance to supplier), not an expense, because value hasn't been received yet. As goods/services are delivered and invoiced, the prepayment is drawn down against the expense. This matches cost to the period of consumption.
Advance paid $6,000 for a 6-month service:
  Dr Prepaid/Advance 6,000  Cr Bank 6,000
Each month: Dr Expense 1,000  Cr Prepaid 1,000
Real-world example A year's insurance paid upfront is capitalized as prepaid and expensed monthly rather than all at once.

Common follow-ups: Why is a prepayment an asset? | How is it drawn down?

Reconciliations Payment Runs Invoice Processing
All 24 Invoice Processing questions