Prepayments deal with accounting for expenditure that covers multiple accounting periods. For example you may pay £12,000 for rent in January to cover the whole year. You'd want this to show in your financial accounts as an expense of £1,000/month throughout the year instead of just as £12,000 in January. The same concept but for money received (sales) is called Accruals. So if someone pays you for one year of service then you would want to recognise 1/12th of the money each month.
Dealing with Prepayments and Accruals in Tally
In most accounting software you need to make a number of Journal entries – this is cumbersome and leaves a lot of room for error. In Tally we've tried to automate as much of this as possible. In the example below we'll only use the word Prepayment for a purchase – but the same process applies to accruals.
For any Outgoing Type (ie: Rent) or Sales Type that needs to be treated for prepayments, edit the type by going to Outgoing Types > Select the outgoing type > Tick the prepayments box. Create your purchases as normal and select the relevant code from the drop-down list.
Running the Report
Then, as often as you like (perhaps monthly or even quarterly) go to the Tools & Reports > General Reports > Prepayments and Accruals. This report will list all invoices or purchases that are:
- Within the date range specified
- Assigned to a code where you've ticked the prepayment box
- Haven't yet had the prepayment journal entries created
At the bottom of the page you'll see a form you can use to prepare the journal entries.
- Start Date – Enter the date you'd like to start recognising the revenue from. So if the invoice was dated December, but it's for services starting from January then you'd enter the 1st of January. If you're processing multiple items and would like to use the respective invoice date then leave the date field blank
- Period – Over what period would you like to recognise the revenue or expenditure? So for an invoice for a year of service, you'd enter 12 months
- Instalments – If you want the revenue or expenditure to show in your account once a month then you'd select 12 (or however many months you entered for the Period option). Alternatively you might want it done quarterly in which case you'd enter 4
- Nominal Code – Choose the Balance Sheet code you want the unrecognised revenue or expenditure to appear against. For sales this would usually be a code called 'Accruals', and for purchases it's be called 'Prepayments'
When you've completed the form just click the Preview Journals button. At this point nothing will have changed in your account. This shows you the entries it is about to make. It's worth noting that it will create journals dated in the future. So these don't affect your accounts until that point in time is reached. However, it does mean that your journal numbers won't always be sequential when ordered by date. If you're happy with the journal entries shown then click the Create Journals button.