Prepayments confusion

liveprincess

Hi i recently passed AP1 so my boss said to me: Oh you can do the prepayments now. I said yes I can try. I work in the manufacturing environment. So he explained briefly what prepayments we account for etc and told me to go through previous journals to see what they have been doing. I was amazed to see that they credit prepayments and debit the expense account every month which is opposite to what I learnt in AP1. When I told him that he was really surprised and I had to bring a book in to show him. He couldn't understand (FD with 30 years experience) and he then asked the bookkeper and she explained to me the way they do things: when invoice comes in they put it straight into prepayments account and then charge it into P&L every month (hence debits in the expense accounts every month) which makes sense really. It's just really hard to get used to it when you have learnt the opposite way.

Has anybody ever come across doing it this way in your experience? What do you think of this?
All opinions appreciated xx

GemmaS

Hi,

This is how we do things at work. At period end every month I have a list of journals that I need to post which includes all of the prepayments transferring them to the P&L. It makes sense to me as well but as you said it caused me a whole heap of confusion when studying AP1 as had to learn it the opposite way to how I was used to doing it! I found AP1 really helpful in my job, as after studying it I found a few strange things going on in the accounts which have now been rectified. None of them were major but however they made the accounts messy in places.

Every company has differently policies of how to account for things like that so its good to get experience doing things in different ways.

Gemma

oakley

I also work in manufacturing and we also charge prepayments to the balance sheet and release every month to the P&L the attributable amount based on numner of weeks in the month. This works fine as long as the balance sheet is reconciled on a monthly basis, otherwise the risk is you are charging cost to the balance sheet which will be a liability to the P&L when someone realsies. I have only seen prepayments described above once in all my previous jobs.