Prepayments are invoices you pay now for periods to come: insurance, software subscriptions, rent in advance, maintenance contracts. The agent reads each invoice's service period, proposes a prepayment and schedule above your threshold, and once certified posts the monthly release from approved schedules. The accountant approves every new schedule and every change, and reconciles the prepayment account each month.
What is prepayment amortisation, and who owns it?
A prepayment is a cost paid before the period it relates to. Instead of expensing a twelve-month insurance premium in the month it is invoiced, you hold it on the balance sheet and release one twelfth each month. The schedule records the invoice, the service period, the monthly release and the remaining balance.
The general ledger or AP accountant usually owns the prepayment schedules. The financial controller sets the policy, including the threshold below which costs are expensed immediately. The process is simple but fiddly: invoices are coded straight to expense, service periods are misread, cancellations are missed, and the prepayment account drifts from the schedule. It mirrors deferred revenue on the sales side, covered in preparing revenue recognition schedules.
What are the steps, and at what depth?
- Agent, depth 1: scans new invoices. Posted and pending invoices for service periods extending beyond the current month, from the invoice text, the supplier's usual billing and the account coded.
- Agent, depth 2: proposes prepayments. For invoices above the threshold: the service period, the amount to defer and a release schedule, with the evidence for the period.
- Person, accountant: approves each new schedule. Confirms the period and whether the cost really relates to future periods.
- Agent, depth 2: drafts the reclassification. From expense to prepayment for approved schedules, parked.
- Agent, depth 3 once certified: posts monthly releases. From approved schedules only, as a template journal.
- Agent, depth 1: reconciles the prepayment account. Ledger balance against the sum of remaining schedule balances.
- Agent, depth 1: watches for changes. Cancellations, credit notes, early terminations and renewals that change a schedule. Each goes to the accountant.
- Person, accountant: approves changes and signs the reconciliation.
| Step | The agent does | Depth | Stays with a person |
|---|---|---|---|
| Scan | Finds future-period invoices | 1 | Nothing |
| Propose | Schedule with evidence | 2 | Accountant approves |
| Reclassify | Drafts journal | 2 | Approves |
| Release | Posts from schedule | 3 | Approving the template |
| Reconcile | Account against schedules | 1 | Signs |
| Changes | Detects and sends | 1 | Approves changes |
What stays with a person, and what evidence does each control leave?
The accountant approves new schedules and changes, because reading a service period is where errors start and where judgement is needed: an invoice dated in March for "annual support" might cover April to March, or the previous year in arrears. The agent posts only what has been approved, at the release amounts in the schedule.
Evidence of the service period. Invoice text, contract or prior invoices. Evidence: attached to each schedule.
Threshold applied. Evidence: the threshold version and any items below it listed separately.
Releases from approved schedules only. Evidence: schedule version on each release journal.
Monthly reconciliation. Evidence: the signed reconciliation of ledger to schedules.
Support retained. Invoices and contracts behind each schedule are kept for as long as your retention policy requires; applying record retention schedules covers how long and what to keep.
What does a schedule look like?
Take an illustrative invoice for 36,000 dated 15 March for a software subscription "for the twelve months commencing 1 April". The agent proposes a prepayment of the full 36,000 at the end of March, releasing 3,000 a month from April to March. The accountant approves. In September the company cancels the add-on module, worth 6,000 a year, and receives a credit note for the remaining six months, 3,000. The agent detects the credit note, proposes reducing the remaining balance by 3,000 and lowering the monthly release from 3,000 to 2,500, and the accountant approves the change.
Where does it usually go wrong?
Invoices coded straight to expense. A large annual invoice is expensed in one month. The scan must cover expense accounts, not just invoices coded to prepayments.
Arrears read as advance. Some suppliers bill after the service. Treating these as prepayments defers costs that have already been incurred. The agent should check the supplier's billing pattern and prior invoices.
Cancellations missed. A contract ends early but the schedule keeps releasing, leaving a balance that never clears, or creating expense for a service no longer received.
Prepayments paid without approval. Large payments in advance carry risk if the supplier fails. They should go through the same approval as any payment; see whether an agent can approve a payment run.
Foreign currency prepayments revalued. Prepayments are non-monetary and should stay at the historical rate. Check the account is flagged correctly for revaluation.
What should you measure?
- Invoices found that should have been prepaid but were coded to expense.
- Differences between the account and the schedules.
- Schedule changes per month, and how many were caught late.
- Close day by which releases are posted.
Where Pryme fits
In Pryme, proposing schedules and posting releases are separate capabilities; posting at depth 3 is earned through Attest on your own past schedules and capped by the role's ceiling. Approved schedules are sealed, invoices external, so a release can only come from a schedule a person approved. Every proposal and release is filed. The finance bounds are in AI agents for finance.
Questions people ask
What threshold should we use?
Your policy decides, usually a value below which the effort of a schedule is not worth it. The agent applies whatever threshold you set and lists items just below it.
Can the agent handle multi-year prepayments?
Yes. The schedule shows the current and non-current portions, which matters for the balance sheet, and the agent reclassifies between them as time passes.
What about accrued income or deferred revenue?
They follow the same pattern on the sales side and are best handled as separate capabilities with their own schedules.