Prepayment accounting is the method by which a business records payments made before the related goods or services are received. Under accrual accounting, an expense belongs to the period in which the benefit is used, not the period in which cash leaves the bank. A payment covering future periods, such as a year's insurance or rent paid in advance, is therefore recorded as an asset, prepaid expenses, and released to the income statement in stages as time passes.
If a company pays 12,000 on 1 October for twelve months of cover and its year ends on 31 December, 3,000 is charged as an expense and 9,000 remains on the balance sheet as a current asset. Finance teams keep a schedule of prepayments and post the monthly release during the month-end close. The seller records the mirror image as deferred revenue. Early repayment of a loan, also called prepayment, is accounted for differently.