Member Since: 15th Jul 2001
24th Jul 2019
As the word “prepayment” suggest the expense must be paid before it can be classified as a prepayment. A simple test is whether the amount classified as prepayment could be legally demanded from the debtor. Clearly if there was not payment then no demand can be made and hence no “current” asset exist at that point.
Many business face this problem with business rates, estate charges etc which is billed in full in advance (sometime more than one year) and paid periodically based on agreed contractual terms.
I would suggest that you create a special “prepayment control account” in your ledger to book payment of this type to. This will allow for me easy identification at the end of each reporting period. The debit balance should be offset in full against your AP Control account. This should be done as a reversing journal each month and the process repeated monthly where a balance exist at the end of the reporting period.
In summary, the request from you German HQ is legitimate and valid. Hope this provides the explanation you need.