Let us now consider the year to 30/6/08:
[{m}.{s}a]
The trader pays £1,260 on 1 March 2008 for the year to 28 February 2009.
[{m}.{s}b]
Let us look at the figures recorded in our T accounts.
Our T accounts show:
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[{m}.{s}c]
In exactly the same way as at 30/6/07 we can say that of the payment of £1,260 for the year 1 March 2008 - 28 February 2009:
Let's see our adjustment to record this prepayment at 30/6/08:
[{m}.{s}e]
Looking at our T accounts we can see that some further adjustment is still required.
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[{m}.{s}f]
The balance in the Rent account is £420 (clearly not a year's rent!). The balance in the Prepayments account is £1,640 (which is an accumulation of prepayments at 30/6/07 and 30/6/08). What we have not done yet is to reverse the opening prepayment in the year 07/08. This adjustment is simply the reverse of the adjustment made at the end of the previous year. |
[{m}.{s}g] |
The balances in our accounts are now:
Rent | £1,220 |
Prepayments | £840 |
It is really better (and clearer) to reverse the opening prepayments at the start of the year. Let us look at our T accounts again and do this.
We see here the opening position for the year to 30/6/08. We have as yet recorded no transactions in our accounts.
[{m}.{s}i]
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[{m}.{s}j]
Let us start by reversing the opening prepayment.
We have now cleared the balance in the Prepayments account to zero. It will remain at zero until the year end (30/6/08) when we will enter the closing prepayments.
The balance in the Rent account is currently £800, even though we have as yet made no rent payment this year. This is the part of the payment in the previous year which covers the period July 07 - February 08. There will be no further entries in the Rent account until 1 March 08 when £1,260 is paid.
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[{m}.{s}l]
At 30 June 2008 we enter the closing prepayment:
We have arrived at the same position as before (in a more logical sequence).
The balance in the Rent account will be transferred to the profit and loss account for the year to 30/6/08.
The balance in the Prepayments account will be included in the balance sheet at 30/6/08.
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[{m}.{s}n]
Note that we can check the balances in these accounts.
07/08 Rental expense for the period:
07/08 Prepayment:
[{m}.{s}o]