A Prepaid Expense is an accrual basis of accounting category of an asset where cash is paid to a vendor for use in the future. The principle insists that an expense should be recognized in the same period its benefit is derived.
Any vendor invoices or contracts paid exceeding a threshold of $10,000 should be reclassed to a prepaid expense account and amortized over the period during which the expense will apply.
For example, paying $12,000 for a 12-month subscription at the start of our fiscal year (July 1st) would result in $1,000 in expense recognized in July, and $11,000 in the asset account Prepaid Expense. The Prepaid Expense, an asset account, would be amortized (expense recognized on the general ledger) at a rate of $1,000 per month, reducing the asset balance by the same.
Each month during close, the General Ledger Accounting team will reclass the expense balance for any invoices exceeding the $10,000 threshold that are to be used in future periods (where a period is defined as a contained duration during which our financial records are closed, most commonly one month). Each subsequent month, a single month’s fraction of the total life of the prepaid expense asset will be amortized to the original GL coding provided on the invoice’s RFP. The individual management reporting views will be encumbered so that the budget is shown as used based on the cash spent on the expense.
No additional burden is required on submission of RFPs, and those should continue to follow the process laid out in Accounts Payable.