Glossary
Prepayment
An expense paid in advance for a benefit the business has not yet received.
What it means
An amount paid in the current period relating to a future period, carried forward as a current asset until it is used.
Example
Paying next year's insurance in advance creates a prepayment.
Why it matters
Prepayments remove costs that belong to a future period from this period's income statement.
In practice
A prepayment reduces an expense by the part that belongs to next year. The income statement then carries only the cost of the current period. The amount paid in advance is shown as a current asset in the statement of financial position, usually near trade receivables.
Suppose the business pays RM2,400 for a full year's insurance, but three months of that cover fall in the next financial year. RM600 is a prepayment. This year's expense is RM1,800 and RM600 appears as an asset. Next year the RM600 becomes an expense as the cover is used up.
Students often confuse a prepayment with an accrual, its mirror image. A prepayment is paid early. It creates an asset that lowers the current charge. An accrual is paid late. It creates a liability that raises the charge. Both apply the matching concept, so profit reflects the true costs of the period.
If you are unsure which way to adjust, one of our teachers can go through year-end adjustments with you using past-paper questions. Book a trial class.
Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.3 Other payables and other receivables (page 14).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
Need prepayment explained properly?
Tell us your child’s year and board on WhatsApp and we will suggest a first lesson. One-to-one and online, from RM75/hr.
One-hour paid trial · Same-day reply