Short-term prepayments

In short, a buyer records a prepayment as an asset, whereas a seller records it as a liability. Because these matters are usually addressed within a year, they are recorded as current assets and current liabilities in each party’s balance sheet.

A prepayment is comparable to a deposit, except it normally falls within a more defined time frame to fulfill the products or services ordered.

Loan payments before the due date, prepaid bills, rent, salary, insurance premium, credit card bill, income tax, sales tax, and line of credit are all examples of prepayment.