What are the upfront costs? Classification and accurate accounting

In doing business in any field, understanding upfront costs plays an extremely important role. In this article, 1C Vietnam will help you learn in detail what the concept of prepaid expenses is , as well as how they are classified and accounted for accurately in the corporate financial management process.

1. What are the upfront costs?

Prepaid costs are costs that businesses must pay before receiving the supply or using the corresponding service. This means that the business has paid a certain amount of money in advance for the future use of resources, goods, or services.

Some core characteristics of this cost can include:

• An account belonging to the assets of the business
• There are many accounting periods involved
• Enterprises allocate prepaid expenses to production and business expenses in each fixed period to ensure cost recognition principles.

For example, a company may prepay for a contract to advertise on a website for a year. Advertising costs paid at the beginning of the year are prepaid costs for the remaining 11 months of that year. According to a 1-month cycle, businesses will have to deduct this expense into that month's expenses.

Understanding this fee helps optimize resources and increase transparency in business operations

2. Basic types of upfront costs

Basic types of prepaid expenses can be classified based on their nature and purpose of use. Specifically, there are two types as follows:

2.1 Short-term prepaid expenses

Short-term prepaid expenses are payments that a business must make before receiving benefits from the use of corresponding resources or services within a short period of time, usually within an accounting year. . This cost has not been included in the costs of production, business, etc. in the period incurred but will be calculated in subsequent accounting periods.

Short-term prepaid expenses that businesses often have to pay include:

• Office, factory, and store rental costs
• Services for business activities
• Cost of purchasing technical documents
• Property repair costs
• Interest on installment purchases,...

It is necessary to ensure accuracy and compliance with accounting rules and standards

2.2 Long-term prepaid expenses

Long-term prepaid expenses are expenses incurred for the purpose of purchasing an asset to serve the company for a term of 2 financial years or more. Instead of calculating it as a one-time production cost, the company will allocate it into several installments in subsequent accounting periods.

Long-term prepaid costs include:

• Expenses related to operating leases of fixed assets, such as land use rights, factories, offices or stores and other fixed assets serving production and business for many financial years.
• Expenditures to establish a company, employee training, advertising and similar expenses are not allocated to accounting periods exceeding 3 years as prescribed to ensure transparency and assessability. financial performance.
• Highly valuable research costs can be allocated over many accounting periods over many years to reflect the true value and long-term benefits that businesses can gain from them.
• The costs of training technical staff and managers also need to be handled accurately, and the allocation of these costs depends on the time and benefits that the business can gain from training.
• The cost to buy insurance, purchase fees and pay once for many years for the business.
• Expenses for moving offices, stores, business addresses, as well as expenses for tools and equipment of great value that are used once or related to production activities within a fiscal year, needs to be allocated appropriately to ensure accurate assessment of the costs of each object.
• Other expenses such as interest from installment purchases, issuance of high-value bonds, repairs to fixed assets, and real estate costs.

Prepaid costs depend on the business situation of the enterprise

3. Principles for recording prepaid expenses

First, prepaid expenses will be recorded as prepaid assets on the balance sheet because those are the benefits the company will receive in the future. Prepaid expenses are considered current assets because they are expected to be consumed, used or exhausted within 1 year through the business activities of the enterprise.

Next, when the company receives benefits from those expenses, they will be recorded on the business performance report.

This recognition principle is consistent with GAAP accounting principles

For example, if a company prepays for a 12-month insurance policy for $30,000, that $30,000 would be recorded as a prepaid expense asset on the business's balance sheet.

Regularly each month, the company will record $2,500 of this cost as an expense on the business performance report, thereby reducing the prepaid expense asset account by 2,500 each month until the end of 1 year. At the end of the year, the prepaid expense account will be zero and the amount of $30,000 will have been recognized on the income statement for the business's 1 year in business.

4. Instructions for accounting prepaid expenses

1C Vietnam would like to send you detailed instructions on how to account for prepaid expenses as follows:

• For prepaid expenses gradually allocated to production and business costs: The accountant will allocate the incurred prepaid expenses gradually into production and business costs. Calculate as follows:

• Debit Account 242 / Debit Account 133 (if any)
• There are Accounts 111, 112, 153, 331, 334, 338,...

Prepaid expenses that have been recorded in production and business expenses are accounted for as follows:

• Debit accounts 623, 627, 635, 641, 642
• There is Account 242.

• Prepaid expenses are fixed asset rent, office and store rent. If there is a direct invoice, the cost of value added tax will be included. Accounted as follows:

• Debit Account 242 / Debit Account 133 (if any)
• There are accounts 111, 112, 331...

• For items exported or rented for multiple periods, it will be based on the time of use or the volume of CCDC, and the shipping packaging is recorded as follows:

• Debit accounts 623, 627, 641, 642,...
• There is Account 242.

• For fixed assets and real estate by deferred payment or installment payment method: when the company purchases tangible or intangible fixed assets or invests in real estate by deferred payment/installment payment method, it will be accounted for. as follows:

• Debit Account 211, 213, 217: Recorded according to original purchase price paid directly
• Debit Account 133 (if any)
• Debit Account 242: Late payment interest
• Credit Account 331 Total expenses to be paid

The interests that the enterprise must periodically pay to the seller are accounted for as follows:

• Debit Account 331
• Account 111, 112: Periodic amount including principal and interest.
• The amount of interest paid in installments or late payments is included in expenses, recorded: Debit Account 635 / Credit Account 242

• In cases where an enterprise incurs costs to repair fixed assets but has not yet deducted them in advance, it will be allocated to many accounting periods. When completed, it will be recorded: Debit Account 242 / Credit Account 241

Enterprises allocate repair costs to production and business expenses during the period according to the periodically recorded period:

• Debit accounts 623, 627, 641, 642,...
• There is Account 242

• For companies that have a loan and have prepaid interest to the lender, record: Debit Account 242 / Credit Accounts 111, 112

Enterprises allocate interest for periodic prepayments as follows:

• Debit Account 635: Recorded in production and business expenses during the period
• Debit Account 241: Recorded capitalization in the value of construction investment assets in progress
• Debit Account 627: Recorded capitalization in the value of assets produced in progress
• There is Account 242

Detailed instructions on accounting for prepaid expenses for businesses

5. 1C:Company Management software supports effective financial management

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1C: Company Management software helps automate financial management processes

For financial management operations, the software possesses the following outstanding advantages:

• Planning revenue at each time helps control the implementation of financial obligations.
• Record, control and analyze debts with customers and suppliers in detail according to each object, each contract or each order.
• Provides a debt aging system, thereby controlling new and old debts.
• Track details of loans and debts.
• Automatically calculate the principal amount and interest amount payable according to each loan contract in each period.
• Payment of employee advances.

Thus, the article has specifically analyzed what prepaid costs are . This is an important indicator for the financial performance of a business. To increase operational efficiency, businesses can refer to professional financial management software 1C:Company Management. Contact 1C Vietnam immediately for more advice about this superior software!