Is it correct to arrive at the balance sheet balance of prepaid expenses as - Opening balance + charge for the year - closing balance. As this shows prepaid expense carried to balances sheet less than what actually prepaid for the year. Thanks a lot.
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Calculate from actual invoices etc
The closing prepayment balance should be supported by a schedule of invoices that are for future months. Ideally with photocopies or scans of the invoices for further clarity.
If nothing has been done to the balance during the year then the opening balance should be reversed and a closing balance build up from first principals. It is fairly unlikely but not impossible that an opening prepayment should still be unwinding one year later.
The opening schedule can be used to suggest the type of thing that that particular business tends to have as prepaid. Typically you are looking for time based things such as:
Rent
Insurance
Rates
Subscriptions
Software support
Advance rentals - photocopier etc.
Arithmetically your approach is right, but in practice you can't calculate the P&L charge for the year until you know the closing prepayments. So you need to work out the prepayments from first principles and from source documents. The previous response is a useful aide-memoire of where to expect to find them.
Are you doing monthly or annual accounts?
For monthly accounts I have a schedule that comprises a column for description, one for a/c code, one for a narrative (e.g. 'Invoice Mar, 12m to 28/02/2015) then for b/f balances at 01/01, then movement Jan, c/f Jan, movement Feb, c/f Feb etc. ending in c/f Dec. Vertically I have the various items, Business Rates, Insurances, etc, in account code order. I then cast any new payments across the page with a + in the month of inception and - each month thereafter. I have the prepayments in one tab and the accruals in another in the same workbook; then any that can be either are easy to shunt from one to the other.
ED:- If you add another column after Dec which divides the Dec balance by the monthly deduction you get the number of months o/s at y/e as a check.