Other Receivables (Prepayments)

Leith

I have a question where I have to extend the trial balance into the SPL/SFP but I'm a bit confused as to where Other Receivables (Prepayments) *Debit Balance* would go?
I know that prepaid/deferred income is a liability to us so goes in the credit column of the SFP but this has a debit balance? Surely it can't be an asset because we've recognised this as a prepayment? Does the debit balance represent an expense to reduce our income for the financial period?

Thanks in advance!

Krisso

No as you have prepaid in this period you credit the expense and debit the SOFP (Prepayment) When the new period starts you would then credit the prepayments to clear the prepayments to zero and debit the expense so that you recognise the correct amount of expense already paid in each period.

Leith

Thanks for your response but I'm afraid I'm still a bit confused by this.
Other Receivables are assets to us, but as this is a prepayment we can't recognise the income received in this financial period. This has a debit balance in the ETB but I thought that because this is prepaid income, we can't recognise this as an asset? It doesn't make sense to me to put it as an expense other than the fact our profit for the year is income less expenses so does the debit balance represent an expense in this case to reduce our income for the year?
I'm sorry if this isn't clear but I can't wrap my head around this!

Krisso

So prepayments works exactly like an expense with the exception of it being input on the SOFP instead if the SPL.

You pay an expense in this period (Debit) but all of the expenses doesn't relate to this period so you would credit expense (SFP) and Debit prepayments (SOFP) to remove the expense from this period.

For your task you are extending the trial balance to the SOFP and SPL so you only need to move the balances to the right columns as the jounal to remove the expense has already been done hence the balance in prepayments on the TB.

The same would work for income received but the opposite way around so debit expense credit prepayments.

sjtoomer

The pre-payment account would be a Current Asset on the SFP. We are talking about the pre-payment account itself, not the account that the money is a pre-payment of.