accounting question

Prepayment is also called payment in advance. Chinese is 預付, 提前繳納, 預繳~

A real case example is your cell phone bill. U can see that the payment that you have to pay in June is for the telephone uses in July.

Why adjusting entries are require for prepayment is:
Due to accounting concept - matching (it can also called accural concept), all relevant expenses and income should be recorded in their appropriate period of time.

Let me use the real case example to illustrate this point. I will use the above example again.

As you may know that the cutoff date of bills may be in the mid of month, says 15th for every month. Then now it is March and you receive a cell phone bill of $200; the telephone bill is to cover the usage from 16th of March to 15th of April.

The payment date is 20th March and the financial year ended day is 31th March.

The double entries are as followings:

Dr. Telephone expenses by $200
Cr. Cash by $200
-> To record the payment of the telephone bills.

At the year end date 31 March,
Dr. Prepayment - telephone expenses by $ 100*
Cr. P&L - Telephone expenses by $100
-> To record the prepayment for 1st April to 15th April.
(* I used 1/2 for the apportionment basis as for simple calculation. For examination purposes, 16/31 would be used for apportionment basis.)

In effect,
you can find that you would only have to one profit and loss item and one balance sheet item.
In P&L, under operating expenses, you have telephone expense $100.
In Balance sheet, you will have an current asset called prepayment of $100.

prepayments 係 預先俾左的費用。
例如: 公司埋數日31/3。15/4收到電話費單要交(15/3-15/4)的費用。那麼不在埋數日內之1-15/4的部份為prepayments。(公司預先付了下一個月的費用)。

好多時公司會計沒有分開，核數師便會做adjusting entries (DR:prepayment CR:expensess) 令盤數符合matching concept。