Accounting for prepaid expenses is accounting important, consists of two main steps: recognition of expenses incurred on account 242 – prepaid Expenses and recurring allocation of partial charges to the account the cost related as 627, 641, 642. The proper implementation of this profession to help businesses control costs, optimize cash flow and accurately reflect the profit according to each states.
However, many businesses, especially those new units applied business upfront cost, often have difficulty in determining the time recorded, the account and allocate a reasonable cost. Accounting mistakes or omissions can lead to cost is incorrectly calculated, affect reported profits and create risks in the audit.
Therefore, master the principles and how to perform accounting prepaid expenses is essential to business control costs, optimize cash flow and ensure transparency in financial reporting. The same Lac Viet Computing learn in detail the steps recorded, the principles of allocation and note important when business costs prepaid.
1. The upfront cost is what? Why do I need accounting?
Prepaid expenses are the expenses that the business has paid but not yet receiving benefits immediately. In other words, the business pay in advance but service, property or benefits related arose only gradually over time. Recorded upfront costs to help businesses accurately track cash flow planning, reasonable cost and avoid the status of “accrued expenses” in an accounting period, causing fluctuations in profit.
Accounting for prepaid expenses is the process of recognition of expenses when incurred, spy on bookkeeping time allocated gradually to the states that business really benefit from that cost.
Important role in the recognition of expenses paid in advance:
- Ensure the allocation of the cost of the right states: When costs are allocated according to any benefit, profit reports and cost closely reflects the actual business activity, from which support the financial decisions more accurate.
- Cash flow management efficiency: Instead of recording the entire one-time expenses, business expense tracking slowly in the states. This helps to balance cash flow, pressure drop, payment and forecast capital needs in the future.
- Support audit and financial transparency: The recognition and allocation of costs upfront true principles to help businesses meet the requirements of the audit, internal control, at the same time increase the reliability of financial reporting.
Through accounting, this business can ensure all expenses are tracked and reported correctly, for both plans cost the annual and long-term plans.
2. Principles of accounting prepaid expenses according to a circular issued
2.1. Principles of accounting according to the circular, 200 & circular 133
Account TK 242 – prepaid Expenses used to record the costs have been incurred, but allocated to many of the accounting period. The accounting and allocation gradually help the cost is recorded on benefit, ensure accounting data and financial reports accurately reflect reality.
The type of cost generally be accounted for upfront costs 242 includes:
- Hire infrastructure, hire of fixed assets.
- The cost of insurance, administrative fees.
- Prepaid expenses interest on the loan or interest on the bonds.
- Cost of major repairs of fixed assets.
- The cost of training personnel, ad ago when the business in operation.
- Tools, tools or supplies used many states.
When costs are value added tax to be deductible, business recorded separately TK 1331 – VAT is deductible. If non-deductible, the total cost of the payment will debit TK 242.
This helps businesses control business costs prepaid, in a clear way, at the same time support cash flow management and financial reporting accuracy.
2.2. The time recorded in prepaid expenses
Prepaid expenses are recorded as soon as business, make payments or incurred the obligation to pay, regardless of the service or related assets not yet in use. Recorded right time to ensure cash flow and costs are managed effectively, while avoiding the recorded cost herded into a cause fluctuations in profit.
This is especially important for the organizations and enterprises are to find out information about accounting prepaid expenses, for determining the time recorded is the basis for reporting on cost and cash flow forecast accuracy.
2.3. Principles for allocation of costs prepaid
Prepaid expenses should be allocated according to duration of use or the justified. Business transfer cost from accounting prepaid expenses 242 to the account the cost of fitting such as management costs, production costs, financial costs, depending on the type of cost and purpose of use.
The follow detail each prepaid account number has been allocated and the rest help business:
- Ensure costs are allocated correctly states, accurately reflect the business performance.
- Assist with the planning cost of long term and short term.
- Increase transparency for financial reporting and auditing.
The principle of this allocation, the business can effectively manage the cost of long-term prepayments and prepaid expenses short term, at the same time optimize the benefits from the expense prepaid without disrupting cash flow or financial statements.
3. Way of accounting for prepaid expenses 242 details
Here are the common and the way the account corresponding to the specified accounting Vietnam:
3.1. When accounting for prepaid expenses need to allocate more states (rent, insurance, prepaid services...)
- When the payment/advance:
Debt TK 242 – prepaid Expenses
Debt TK 1331 – VAT is withheld (if tax deductible VAT)
Have TK 111/112 (cash/bank deposit) or TK 153/331/334/338... - Periodically (by month/quarter/year), allocation of costs to cost match:
Debit the expense account (for example TK 623/627/635/641/642)
Have TK 242 – prepaid Expenses
3.2. When prepaid rent of fixed assets, lease infrastructure under the lease operates more states
- Recorded prepaid:
Debt TK 242 – prepaid Expenses
Debt TK 1331 (if no tax)
Have TK 111/112 - Periodically allocated to operational costs: usually cost management business
Debt TK 642 – Cost business management
Have TK 242 – prepaid Expenses
3.3. When the upfront costs of tools, packaging, rotation, utensils for rent used many states
- When using/for rent or when paid in advance:
Debt TK 242 – prepaid Expenses
Have TK 153 – tools - Then allocate gradually according to the criteria justified in the cost of production/business pen payment:
The debt cost (TK 623/627/641/642 ...)
Have TK 242
3.4. When the business prepaid interest on the loan, interest on the bonds or the purchase of fixed assets according to the method, deferred/installment
- When prepaid interest on the loan/bond:
Debt TK 242 – prepaid Expenses
Have TK 111/112 - The periodic allocation of the interest paid in advance on the cost of financing or capitalization to the value of the property unfinished (depending on intended use) by entry as:
Debt TK 635 – financial Expenses (or Debt TK 241/627 if capital goods)
Have TK 242 – prepaid Expenses
3.5. When the cost of major repairs of fixed assets and business decided to allocate the cost over several states
- Upon completion of repair: recorded accounting of the cost upfront:
Debt TK 242 – prepaid Expenses
Have TK 241 – construction in progress (2413) - Periodically allocated to the cost of production/ management:
Debt TK 642 (or cost matching)
Have TK 242
4. Accounting prepaid expenses what is the make
For accounting prepaid expenses (TK 242) regulations, to ensure the financial statements reflect the honest business, to note some of the principles of business the following:
- Determine the true nature prepaid expenses: Only those expenditures beneficial for many other new accounting are accounted for in TK 242. The expenditures used to put directly into the cost in the states to avoid false trading results.
- Recorded cost of the right time: the Cost must be recognized immediately when incurred the obligation to pay for it, not wait until the service or property start using. Recorded right time helps accurately reflect the money flow and business results, according to each states.
- Allocated according to the criteria of reasonable and consistent with a Business needs to allocate costs based on time of use or level of benefit. Target allocation formula must have the facility and maintain consistency in order to ensure stability and transparency of accounting data.
- Detailed tracking each expense prepaid: Each account prepaid expenses need to be tracked separately (total value, states allocated number has been allocated, the remaining number). The follow the detailed help avoid omissions, misallocation or recorded inaccurately.
5. Optimal solutions to management accounting by accounting system Accnet ERP
The accounting costs prepaid craft easily lead to errors, omissions vouchers or uneven distribution. Accnet ERP helps businesses solve this problem in an effective way:
- Automation of accounting: the software automatically recorded in prepaid expenses, allocated according to the states, reducing the risk of confusion and errors manually.
- Detailed tracking each expense prepayment: displays the number of already allocated, the number of remaining states specific allocation, help to control the cost exactly.
- Cost management in project/department: convenient for the organizations and enterprises there are many types of prepaid expenses of many different parts.
- Reporting standards, transparency: support auditing, financial statements, tax settlement standards, reducing legal risks and improve operational efficiency.
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Business can learn and apply Accnet ERP to accounting prepaid expenses accurately, save time and optimize cash flow, at the same time improve the efficiency of financial management of goods.
The accounting prepaid expenses not only help businesses comply with the accounting principles but also an important tool to manage cash flow, optimal cost and financial planning efficiency. When costs are allocated properly and track details, business easily evaluate the effective use of resources, reduce financial risk and increase transparency in reporting. Apply business process costs prepaid, in a way, it also help to improve the ability of decision strategies and improve management capability overall.
