{m}.{s}.1 Second year's payment

Step 1

Let us now consider the year to 30/6/08:

[{m}.{s}a]A monthly time line from 1 March 07 to 30 June 09. Payment made on 1 March 07 of 1,200 for year ending 30 June 07. Therefore 400 relates to y/e 30 June 07 and remaining 800 is prepayment.

Step 2

The trader pays £1,260 on 1 March 2008 for the year to 28 February 2009.

[{m}.{s}b]A monthly time line from 1 March 07 to 30 June 09.  Next payment made 1 March 08 of 1,260. 4 months relates to y/e 30 June 2008.

Step 3

Let us look at the figures recorded in our T accounts.

Our T accounts show:

  1. The prepayment of 8 months' rent b/f in the Prepayments account
  2. The rent payment of £1,260 on 1/3/08
Rent
2008   
Mar 1 Bank1,260  
    
    
    
Prepayments
2007   
Jul 1 Bal b/f800  
    
    
    

[{m}.{s}c]

Step 4

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:

  1. 4 months or 4/12 of the total £1,260 belongs in the year 30/6/08 i.e. £420
  2. 8 months or 8/12 of the total £1,260 belongs in the year 30/6/09 i.e. £840
[{m}.{s}d]A monthly time line from 1 March 07 to 30 June 09.  Of 1,260 payment on 1 March 08 420 relates to y/e 30 June 80 and remaining 840 is prepayment at year end.

Step 5

Let's see our adjustment to record this prepayment at 30/6/08:

[{m}.{s}e]

{m}.{s}.2 Reversal of Opening Prepayment

Step 1

Looking at our T accounts we can see that some further adjustment is still required.

Rent
2008 2008 
Mar 1 Bank1,260Jun 30 Prep'ts840
    
    
    
Prepayments
2007   
Jul 1 Bal b/f800  
2008   
Jun 30 Rent840  
    

[{m}.{s}f]

Step 2

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]

Step 3

The balances in our accounts are now:

Rent £1,220
Prepayments £840
[{m}.{s}h]

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.

{m}.{s}.3 Second year

Step 1

We see here the opening position for the year to 30/6/08. We have as yet recorded no transactions in our accounts.

A monthly time line from 1 March 07 to 30 June 09 showing opening prepayment of 800 at 30 June 2007.[{m}.{s}i]

Rent
    
    
    
    
    
Prepayments
2007   
Jul 1 Bal b/f800  
    
    
    

[{m}.{s}j]

Step 2

Let us start by reversing the opening prepayment.

Step 3

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.

Rent
2007   
Jul 1 Prep'ts800  
2008   
Mar 1 Bank1,260  
    
Prepayments
2007 2007 
Jul 1 Bal b/f800Jul 1 Rent800
    
    
    

[{m}.{s}l]

Step 4

At 30 June 2008 we enter the closing prepayment:

Step 5

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.

Rent
2007 2008 
Jul 1 Prep'ts800Jul 1 Bal b/f840
2008 Jun 30 P&L a/c1,220
Mar 1 Bank1,260  
 2,060 2,060
Prepayments
2007 2007 
Jul 1 Bal b/f800Jul 1 Rent800
2008   
Jun 30 Rent840  
    

[{m}.{s}n]

{m}.{s}.4 Check the figures

Note that we can check the balances in these accounts.

07/08 Rental expense for the period:

07/08 Prepayment:

 

Original time line from 1 March 07 to 30 June 09. 800 + 420 = 1,220 being transferred as charge to P&L for y/e  30 June 2008. 840 being shown in prepayment account as prepayment at 30 June 2008.[{m}.{s}o]