Prepaid Expenses

General Ledger

Allowable/Unallowable

As a sound business practice, goods and services should be received and accepted before payment is made to the supplier. Prepayments are allowed but should be avoided, if possible.

Certain transactions are more applicable to prepayments, such as subscriptions, rents and leases.

If a particular vendor only does business by receiving prepayments, we should make a strong effort to find another vendor. The department will be responsible for their loss if payment is made and the goods/services are not received or acceptable.

Accounting

Under full accrual accounting, expenses should be applied to the fiscal years when goods and services are received. When goods are purchased, applying expenses to fiscal years is a straight forward decision because the key point is to apply the expense to the fiscal year when the goods are received. For example, if goods are received on 6/15/2020 the expense should be recorded in fiscal 2020. If goods are received on 7/15/2020, the expense should be recorded in fiscal 2021.

When services are purchased, applying expenses to fiscal years is more complicated in some cases.

This is an easy task when the services are paid for after the service period and there are regular monthly or periodic billings. For example, if the service period is the month of June 2020 and a billing is paid in July 2020, the expense should be applied to fiscal 2020 - the year benefiting from the expense – even if the supplier uses a July 2020 invoice date.

Normally, services should be paid for after they have been rendered; however, some transactions that is not the normal practice. Examples are travel arrangements paid in advance and multi-period service agreements. At the end of this guidance is a list of common examples and applicable guidance.

PeopleSoft account code 142002, Prepaid Expenses, must be used in some cases to properly allocate expenses between fiscal years when services are paid in advance. Departments need to monitor this Prepaid Expense account in their funds to ensure the asset is properly liquated in subsequent years. The best way to monitor the Prepaid Expense account is using the PeopleSoft general ledger inquiry screen. With this screen the user can track down the origin of the account balance and drill down to the applicable transactions. The Cost Transfer Request form is the best form for converting a Prepaid Expense account to an expense. Contact the Accounting Office if you have questions.

This account code cannot be used in the 34000 – 39999 fund range. If it is needed for a transaction in this fund range a local fund must be found instead.

It is important to note that for grants the supplies or service also have to benefit the project within the project period of performance. Note the guidance for example # 1.

Here is the list of common examples and our guidance:

Example		Guidance
1) Employees requesting reimbursement in April (old year) for paying registration fees, flights, lodging, other travel (including study abroad trip expenses) related to conference next October (new year).		Normally these transactions involving individual employee travels will be immaterial so they may be expensed in the old year. Group travel, such as Athletic teams, should use Prepaid Expenses in old year so the expense is recognized in the new year. This guidance is the same if the department directly pays the employee's expense. The guidance is also the same if the employee payment was in June and the conference is in July. (On grants, if the grant period ended June 30, this flight would not be allowable on the grant.)
2) Employees requesting reimbursement in July (new year) for paying registration fees, flights, lodging, other travel expenses they paid in June (old year) related to conference next October (new year).		Normally these transactions involving individual employee travels will be immaterial so they may be expensed in either year.

3) Employees requesting reimbursement in July (new year) for paying registration fees, flights, lodging, other travel related to conference last June (old year).		Expense in the old year.


4) Department enters into a service agreement with a supplier for $150,000 in January 2020. The service period is January 1, 2020 to June 30, 2021.		Allocated $50,000 expense to old year and record $100,000 Prepaid Expense in the old year. Convert $100,000 Prepaid Expense to Expense in the new year.

5) Department enters into a service agreement with a supplier for $250,000 in January 2020. The service period is January 1, 2020 to June 30, 2022.		Allocated $50,000 expense and record $200,000 Prepaid Expense in the old year. Convert $100,000 Prepaid Expense to Expense in next year and the remaining $100,000 expensed in final year.

6) Construction contractor billing - work performed 6/11/2020 to 7/10/2020.		New year expense

7) Construction contractor billing - work performed in 6/1/2020 to 6/30/2020. Substantial completion certificate signed in July 2020.		Old year expense

8) Department enters into a service agreement with a supplier in November 2019 for $28,000. The service period is January 1, 2020 to December 31, 2020.		Allocated $14,000 expense to expense and record $14,000 Prepaid Expense in old year (FY20). Expense the remaining $14,000 in new year (FY21).

9) Department enters into a service agreement with a supplier in May 2019. The service period of the agreement is 5/13/2019 to 7/19/22 and the total contract is $20,000.		Option 1: pay all of agreement in FY19 using Prepaid Expense. Allocate $10,000 of expenses to both FY20 and FY21. (Consider FY19 & FY22 allocated share as immaterial.) Option 2: allocate minor share of expense to FY19 & FY22.

10) Department enters into a service agreement with a supplier in September 2019 for a lifetime/infinite period.		Depends on the $ amount. Consult with Accounting. Accounting will consider coding to a capitalized intangible asset code or charge all to expense in old year.