• 31 March, 2025

In business accounting, one of the common areas that can cause confusion is prepayments. Many expenses businesses incur—like insurance, subscriptions, or event bookings—are paid upfront but cover a future period. How these are treated in your books can make a big difference to both financial reporting and tax outcomes.

What is a Prepayment?

A prepayment is when you pay for goods or services in advance, but don’t receive the benefit until a future reporting period. For example, paying your insurance premium upfront for the year or pre-booking accommodation for an upcoming conference.

From an accounting perspective, these payments are not treated as an immediate expense. Instead, they are initially recorded as an asset on your balance sheet under “Prepaid Expenses” until the benefit is received. Each month (or reporting period), a portion of the prepayment is moved into your Profit & Loss (P&L) account as an expense.

Common examples of prepayments include:

• Rent
• Insurance premiums
• Subscriptions and memberships
• Advertising campaigns
• Conference or event bookings
• Contracted services

Prepayment Tax Rules – Small Business Concessions

For small businesses (with turnover under $10 million), the ATO allows certain prepayments to be claimed immediately under specific rules:

✅ Prepayments under $1,000
✅ Goods or services received within the same income year as paid
✅ Salary/wage prepayments under a service contract
✅ Payments required by law (e.g., vehicle registration fees)

Example – Immediate Deduction

A company prepays $19,000 in March 2024 for a service running from April 2024 to January 2025. Because it lasts less than 12 months and ends in the following financial year, the full amount can be deducted immediately.

Example – Prepayment to Be Apportioned

If a company prepays $200,000 in June 2024 for goods delivered monthly until July 2025, this doesn’t meet the 12-month rule. The payment must be apportioned between financial years.

Bookkeeping Process for Prepayments

When recording prepayments, it’s important to use the correct accounts:

1. Record the payment as an asset in your “Prepaid Expenses” account.
2. Claim the GST upfront at the time of payment (whether you are on cash or accrual basis).
3. Allocate monthly journals to move the expense from the asset account to the relevant expense account.

Example – Workers’ Compensation Insurance

• Payment made: $4,400 (including $400 GST)
• Prepaid asset recorded: $4,000
• GST claimed upfront: $400
• Monthly journal: $333.33 moved from Prepaid Asset to Insurance Expense until the balance is fully allocated.

This ensures your Profit & Loss statement reflects the expense in the correct period, while your balance sheet shows the portion of the payment still to be consumed.

Why Prepayments Matter

Accurately managing prepayments helps businesses:

• Avoid overstating expenses in one year
• Improve cash flow planning
• Stay compliant with ATO rules
• Provide a true picture of financial performance

 

👉 At Workpaper Solutions, we help accountants and businesses streamline processes like prepayment allocation, GST treatment, and year-end adjustments. Our focus is on accuracy, compliance, and saving you time, so you can concentrate on running your business while we keep the books in order.