№1(12)(2013)

In their work, accountants need to account for expenses that cannot be recognized in the current reporting periods. In this article we are going to look at the most significant points in classifying and accounting prepaid expenses. Let us look at the basic terms used in classification and accounting of prepaid expenses.

Prepaid expenses are expenses, incurred in the current period but attributable to expenses of future periods.

Lease payment is a fixed payment by leaseholder to the lessor irrespective of their economic results. The lease amount can be changed by agreement of the parties, as well as in other cases provided by law.

Commercial patent is a government certificate that shows the right of a business entity to engage in certain business activities during the prescribed time limit.

License is a state standard document certifying the right of the licensee to engage in economic activities stated therein over a certain period, subject to the license terms.

Development of production is a range of measures, aimed at production of new types of finished products to be sold in the consumer market, as well as providing the manufacturer with necessary technical documentation attesting to the quality characteristics of the product to the state standards and giving the company the right to produce and sell products.

The main objects of accounting prepaid expenses include:

- expenses related to payment of works and services, sold and provided over several reporting periods (lease, insurance, subscriptions to periodicals and reference media, etc.);

- expenses related to payment of trade patent;

- development of new industries and units;

- expenses for the development of new production facilities and preparation for the seasonal production;

- expenses related to the cost of licenses;

- expenses before the season of active operations (in agriculture and seasonal industries);

- other prepaid expenses.

Prepaid expenses are accounted under Instruction 291[1] on account 39 «Prepaid expenses».

Now let us consider the order of registration and correspondence of accounts by major business transactions associated with the accounting of prepaid expenses.

1. Accounting for prepaid expenses, related to prepaid works and services, whose implementation and provision occurs over several reporting periods

Advanced payment for works and services (advance lease payments, subsription, payment of the insurance policy, etc.) cannot be recognized as current expenses, because:

- in accordance with p. 9.2. NAS № 16 «Expenses», preliminary (advance) payment for stock, works and services is not recognized as expenses;

- in accordance with p. 6 NAS №16 «Expenses», expenses in the reporting period recognized as decrease in assets or reduction in liabilities, which leads to a decrease in net worth.

Listed expenses are recognized as expenses prepaid on the grounds that they relate to future reporting periods, in which they will be included in expenses.

2. Accounting for expenses prepaid, related to advance lease payments

Expenses prepaid are expenses, related to the advance payment under the lease agreements, and provided that the advance is paid for more than one reporting period. Also a necessary condition for the recognition of advance payments lease expenses prepaid is the mandatory advance lease payment defined by contract terms.

Advance lease payments are recognized as prepaid expenses in the reporting period when they are incurred.

Distribution and inclusion in the current expenses of the costs, related to advance lease payment, is made in equal installments over the period, when the pre-payment was made. Some of these expenses are included in the expenses of the reporting period on the basis for the contract terms or acts of reception and transfer of services provided under such lease agreement.

Here are accounts, where lease transactions are recorded, adjusted for advance lease payments, recognized as prepaid expenses.

3. Accounting for prepaid expenses on subscription to periodicals and reference publications

Subscription to periodicals and reference publications is done by way of:

- paying respective invoice (at non-cash settlement);

- filling and payment of receipt to subscription media.

Recognition of prepaid expenses, related to prepaid periodicals (subscription), is done in the reporting period, in which they are incurred.

Distribution and inclusion in the current expenses of the costs, related to advance payment for periodicals and reference publications, is made in equal installments over the subscription period, based on accounting calculations.

Let’s look at accounts, where transactions, relating to subscription to periodicals and reference publications, are recorded.

Depending on the nature of periodicals and reference books, their sphere and use, expenses, related to their acquisition in the future are largely written off to the respective expenses accounts (class 9). However, exceptions are possible when the expenses on subscription will form creation of library collections. But that is another question, not related to this topic.

4. Accounting for prepaid expenses, associated with payment of the insurance policy

Insurance transactions are formalized by insurance contract (insurance policy), concluded between the company and the insurer (insurance company).

Payment of the insurance policy is a one-off payment (sometimes such payment breaks into several payments) for the duration of insurance, that is, for the future periods. Thus, expenses for payment of the insurance policy are recognized expenses prepaid with their subsequent uniform distribution (write-off) in the accounting periods over insurance period.

Expenses, related to payment of insurance, are recognized in the reporting period, in which they are incurred.

The grounds for the inclusion of a specific part of these expenses into expenses of the reporting period is the insurance contract (insurance policy).

Below are accounts, where transactions, related to the payment of the insurance policy, are recorded.

5. Accounting for prepaid expenses, related to payment of trade licenses and patents

Expenses for the purchase of trade patent are recognized expenses prepaid and written off by the systematic distribution of its value between reporting periods. Grounds for inclusion in expenses prepaid are trading patent, license.

There are three possible options of accounting for transactions on acquisition of a trade patent:

- Option №1 – paid amount of the trade patent for the reporting period is less than accrued amount of income tax;

- Option №2 – paid amount of the trade patent for the reporting period is bigger than accrued amount of income tax;

- Option №3 – paid amount of the trade patent for the current year, after which the company received a loss.

5.1. Accounting of trade patents is corresponded to the following accounts

5.2. Here is the correspondence of accounts on accounting for licenses

Here we do not account include as 84 a subaccount, as the enterprise can on its own assign a subaccount to account for incurred costs based on appropriateness and system of accounting for expenses, approved by the accounting policies of an enterprise.

6. Accounting for expenses for development of new production facilities and preparation for the seasonal production

The specified type of expenses is mainly used for industrial and agricultural enterprises, so these types of expenses we will characterize briefly.

6.1. Accounting for prepaid expenses, related to the development of new industries and units.

Works, related to the development of new industries and units, are carried out based on the order of the company director.

The order usually contains:

- grounds for conducting such works;

- amount (list) of works;

- planned duration of the works (start and end date);

- staff, who will conduct works for the development of new industries and units.

Such expenses are aimed at generating income from their operation in future accounting periods. Thus, the costs incurred are recognized as expenses prepaid. Upon completion of works, related to the development of new industries and units, expenses prepaid are included in cost of manufactured goods (performed works, provided services). These expenses are written off uniformly.

The method of uniform distribution of expenses provides their inclusion in expenses in the reporting period in equal parts over the period of their write-off, as defined by the enterprise. Depreciable life of expenses is determined by the relevant order of the head of the company.

6.2. Accounting for prepaid expenses, related to the preparatory works for the production in seasonal industries

Expenses relating to works preparing to production in seasonal industries include the following:

- major repairs of leased fixed assets, if carried out at the expense of leaseholders’ funds;

- preparatory agricultural works;

- preparatory works at enterprises of processing industry production (processing of fruits and vegetables, sugar industry, primary wine-making, etc.).

Preparatory works in the utility and processing agricultural economy can also be carried out both on the economic and contractual basis.

In the seasonal production all expenses at the beginning of production activities are accumulated on account 39 «Expenses prepaid», and from the start of production in proportion are written off to general production expenses of the current period during the season.

We hope that this article will help you understand more clearly what are the expenses prepaid, and facilitate accounting for the above operations