Build a prepaid-expense schedule that rolls forward.
A prepaid balance represents a service period still to be expensed. The next month needs to start with the balance the previous month left behind.
Keep the coverage dates with the payment
Assume a business pays $12,000 in April for equipment maintenance covering April 1 through the following March 31. For this illustration, it uses an accrual basis and a straight monthly release of $1,000. Sales tax is omitted.
The April payment initially creates a $12,000 prepaid asset. Releasing $1,000 to April maintenance expense leaves $11,000 in that asset at month-end. May starts with that $11,000 balance.
Illustrative prepaid maintenance schedule
A $12,000 equipment-maintenance contract covers April 1 through the following March 31. It is paid in April and charged at $1,000 per month on an accrual basis. Sales tax is omitted.
- Opening prepaid balance
- $0
- Additions
- $12,000
- Expense released
- $1,000
- Closing prepaid balance
- $11,000
The payment creates a prepaid asset. One month is released to maintenance expense.
| Month | Opening prepaid balance | Additions | Expense released | Closing prepaid balance |
|---|---|---|---|---|
| April | $0 | $12,000 | $1,000 | $11,000 |
| May | $11,000 | $0 | $1,000 | $10,000 |
| June | $10,000 | $0 | $1,000 | $9,000 |
April. The payment creates a prepaid asset. One month is released to maintenance expense.
May. The schedule begins with April’s closing balance and releases another month.
June. Three months have been expensed. Nine months remain in the prepaid balance.
Explain every movement
The schedule records the opening balance, new prepayments, expense released and closing balance. April closes at $11,000, May at $10,000 and June at $9,000. The closing balance should agree to the corresponding prepaid account in the ledger.
Keep the underlying maintenance contract or invoice reference and coverage dates beside its schedule line. If several prepaid contracts share the account, their individual closing balances should add to the account total. A single total cannot explain which service period remains.
Changes need their own treatment
A renewal, cancellation or credit can change the remaining balance. Record the change against the affected item and reassess the release for its remaining coverage period. Do not continue an obsolete monthly release merely because it appears on last month’s journal.
A payment made partway through a month may require a different allocation under the business’s accounting policy. The monthly convention used in this example should not be copied automatically to every contract.
At the final month
After twelve $1,000 releases, the original $12,000 balance is fully expensed. A renewal is a separate addition with its own coverage period. The old item can then close without carrying a residual balance into the new maintenance contract.