SOP Library
SOP NO:
FS-FA02
(List of Exhibits/Attachments)
Missi
on
:
Finance and Administration
Area:
Financial Services (FS)
Activity:
Financial Accounting (FS-FA)
Title:
Accounting for Prepaid Expenses
Date Approved/Issued:
02/11/1985
Date Effective:
03/01/1985
Digest:
I. TERMS OF REFERENCE
A. Rationale
B. Objective
C. Scope
D. Basis
II. IMPLEMENTING GUIDELINES
1.
Prepaid Expenses
Payments for these expenses are authorized to be made in advance of the
receipt of goods and services applicable thereto. NFA's prepaid expenses
are for personal services, trucking, sea freight, communication service,
advertising, rental, insurance, premium, interest, subscription to
publication, bond discount, importation charges, and other expenses which
should be paid in advance as per agreement between the NFA and the other
party concerned.
2.
Materiality of the Prepaid Expenses
The materiality of the amount involved shall be used as basis in
determining whether the prepaid items shall be recorded as a prepayment
or as an outright expense. This was based on available historical data
involving NFA prepaid expenses.
3.
Prepaid Items to be Recorded as Prepayments
Sea Freight, Interest, Bond Discount, and Importation Charges are the
prepaid items which should be recognized as prepayments (asset account) at
the time of payment. Corresponding adjustment of each of these accounts
should be made every end of the month to take-up the expired portion of
the prepayment previously set-up. The amount paid for each of these items
is so material that the monthly financial reports shall be significantly
affected if such is charged as an outright expense of the time of payment.
4.
Prepaid Items to be Charged as Outright Expenses
The rest of the prepaid items as given in the NFA's Revised Chart
of Accounts such as Personal Services, Trucking, Communication Service,
Advertising, Rental, Insurance Premium, Subscription to Publication, and
other prepaid items are to be recorded as outright expenses, on the month
they were paid. The amount involved for each of these items is not
material enough as to affect significantly the results of operation for
the month, and can, therefore, be absorbed by that month's financial
condition. This accounting policy shall mean that there shall be no
monthly adjustment to be made for the expired portion and thus, shall
result in savings in terms of man-power and supplies utilization. However,
this policy is only applicable for those expenses whose benefits cover the
current year's o
pe
ration.
In case of those expenses whose benefits extend beyond the
calendar year, that portion of the expense covering the current year
should be charged as an outright expense and that extending beyond the
current year should be recorded as a prepayment as of the calendar year.
At the beginning of the succeeding year, such prepayment set-up shall be
adjusted to an expense account for that portion chargeable to that year's
operations.
5.
Balance Sheet Presentation
Prepayments is a general ledger account classified under other
Assets - Miscellaneous Assets and Deferred Charges.
For control and monitoring purposes, a subsidiary ledger for each
of the following prepaid items shall be maintained:
5.1 Personal Services*
5.2 Trucking*
5.3 Sea Freight
5.4 Communication Service*
5.5 Advertising*
5.6 Rental*
5.7 Insurance Premium*
5.8 Interest
5.9 Subscription to Publication*
5.10 Bond Discount
5.11 Importation Charges
5.12 Others*
*The subsidiary ledger for the prepaid item marked with an asterisk shall
only be maintained in case there is a portion of the paid amount set-up as
a prepayment.
Each subsidiary ledger shall be used as a basis for subsequent adjustment
of the prepaid account to take-up the expired portion. A sub-subsidiary
ledger for each of the subsidiary ledger accounts need not be maintained.
A
Schedule of Prepayments
(Exhibit 1) shall be prepared and submitted
together with the monthly Trial Balance. Its copy distribution shall
follow that of the Trial Balance.
6.
Pro-Forma Entries
6.1 To set-up the prepaid item as an asset based on processed
disbursement voucher:
DR: Prepayments - Appropriate
Subsidiary Ledger Account xxx
CR: Vouchers Payable xxx
6.2 To adjust the expired portion of the prepaid item at the end of
the month
DR: Project Activity - Cost
Classification - Expense
Classification - Expenditure
Object xxx
CR: Prepayments - Appropriate xxx
6.3 To set-up the prepaid item as an outright expense:
DR: Project Activity - Cost
Classification - Expense
Classification - Expenditure
Object xxx
CR: Vouchers Payable xxx
6.4 To set-up the prepaid item as an outright expense (for that
portion which benefits the current operation) and as an asset (for that
portion which benefits future periods):
DR: Project Activity - Cost
Classification - Expense
Classification - Expenditure
Object
DR: Prepayments - Appropriate xxx
SL Account xxx
CR: Vouchers Payable
6.5 At the beginning of the succeeding year, charge the prepayment
set-up in 6.4 to an expense account (for that portion which benefits that
year's operations):
DR: Project Activity - Cost
Classification - Expense
Classification - Expenditure
Object - xxx
CR: Prepayment - Appropriate
SL Account xxx
III. RESPONSIBILITIES
IV. FLOW CHART
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EXHIBITS
Exhibit 1 - Trial Balance Schedule of Prepayments
Exhibit 1 - Trial Balance Schedule of Prepayments