Prepayment

What Is Prepayment?

Prepayment is an accounting term for the settlement of a debt or installment loan in advance of its official due date. A prepayment might be the settlement of a bill, an operating expense, or a non-operating expense that shuts an account before its due date. A prepayment might be made by an individual, a corporation, or some other type of organization.

Figuring out Prepayment

Many types of debts and obligations are settled in advance through prepayment. Corporations could prepay rent, wages, revolving lines of credit, or other short-term or long-term debt obligations.

Consumers can prepay credit card charges before they really receive a statement. Or on the other hand they could pay a loan off right on time, by refinancing the debt through another lender or by paying the whole debt using cash on hand.

A few loans, like mortgages, may incorporate a penalty for prepayment. On the off chance that a loan incorporates such a penalty, the borrowers must be made aware of and consent to the provision at the time they take out the loan.

The penalty may just apply to paying off the whole balance, generally by refinancing the mortgage. A borrower can normally make intermittent extra payments of the principal without penalty.

A prepayment may be made for the whole balance of a liability or it very well may be a partial payment of a larger loan that is made in advance of the due date.

Types of Prepayment

Prepayments are common in various settings. Individuals and large organizations make prepayments.

Corporate Prepayments

In the corporate environment, expenses are the most common prepayments. These expenditures are paid in full in one accounting period for goods or services that will be consumed in a future period. The prepayment is renamed as a normal expense when the asset is really utilized or consumed. A prepaid expense is first sorted as a current asset on the company's balance sheet.

For instance, a company can list $6,000 as a current asset under the prepaid rent account on its balance sheet on the off chance that it rents office space for $1,000 per month and prepays a half year's rent. The company would reduce the current asset by $1,000 in each subsequent month and would list the expense on its income statement as an operating cost of $1,000 as the total prepaid rent expenses are really incurred.

Prepayments by Individuals

Individuals additionally make prepayments, and the personal accounting process is a lot more straightforward. A consumer could run up a month to month credit card bill with a settlement date of 30 days after the month's end.

Assuming that a consumer causes $1,000 of total expenses on the card and pays it off on the 30th day of that month, it's viewed as a prepayment on the grounds that the bill isn't due for an additional 30 days. The consumer's credit card company tracks these prepayments, so there is little requirement for the consumer to personally account for it.

Prepayment by Taxpayers

Taxpayers consistently — deliberately or not — make a prepayment of taxes when part of their pay is kept for taxes. Technically, taxes are due approximately April 15 every year, except their employers are required to keep taxes in each pay period and send the money to the government for the representative's sake.

Self-employed individuals are expected to make a prepayment of taxes by filing quarterly estimated taxes.

Regardless, in the event that they pay more than their taxes due for the year, taxpayers receive any excess back as a tax refund