Prepaid expenses are future expenses that have been paid in advance. As the item purchased is used, the expense is recognized.
At month end, Finance reviews all expenditures >$10,000 to determine if a prepayment needs to be recognized. If it does, Finance will raise a prepayment on behalf of the affected department. The prepayment will be recognized within 12201 - Prepaid Expenses and amortized over the period during which the expense will apply. Finance will also raise an encumbrance against the department for the remaining expense balance to ensure simple review of department’s spending against budget.
Example:
$12,000 paid on July 1, 20XX for a 12 month subscription to:
RFP submitted by department to pay $12,000
Dr 76405 - Subscriptions $12,000
Cr 21101 - Vouchers Payable $12,000
At month end, Finance determines that the following accounting treatment is required:
Dr 12201 - Prepaid Expenses $11,000
Cr 76405 - Subscriptions $11,000
An encumbrance will be raised against the department for $11,000.
The next month, and following months (until the full expense is recognized), Finance will:
Dr 76405 - Subscriptions $1,000
Cr 12201 - Prepaid Expenses $1,000
The encumbrance will be reduced by $1,000.
Note - There is an exception to this process for prepaids related to Sodexo payments specific to the contractual arrangement with Sodexo as a vendor. Contact Finance for further details if required.