Deferred expenses and prepayments (also known as prepaid expenses), are both costs that have already occurred for unconsumed products or services yet to receive.
Such costs are assets for the company that pays them since it already paid for products and services still to receive or that are yet to be used. The company cannot report them on the current Profit and Loss statement, or Income Statement, since the payments will be effectively expensed in the future.
These future expenses must be deferred on the company’s balance sheet until the moment in time they can be recognized, at once or over a defined period, on the Profit and Loss statement.
For example, let’s say we pay $ 1200 at once for one year of insurance. We have already paid the cost now but haven’t used the service yet. Therefore, we post this new expense in a prepayment account and decide to recognize it on a monthly basis. Each month, for the next 12 months, $ 100 will be recognized as an expense.
Odoo Accounting handles deferred expenses and prepayments by spreading them in multiple entries that are automatically created in draft mode and then posted periodically
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