Prepayments in not-for-profit-accounting

What are prepayments? Prepayments, often called prepaid expenses, are payments your organisation makes in advance for goods or services that will be received or used in the future. Simply put, a prepayment is an expense paid early before receiving the benefit. Because the benefit from that payment extends into the future, accounting treats it as an asset on your balance sheet rather than an immediate expense. Common examples of prepayments for charities and not-for-profits include:

• Insurance premiums paid upfront: paying a year’s insurance coverage in advance.
• Rent or lease paid in advance: such as paying rent quarterly or annually ahead of time.
• Annual subscriptions or memberships: paying a yearly membership fee or software subscription at the start of the period.

In each of these cases, you’ve paid out cash now, but the service will be utilised over a future period. Until that period arrives, the payment is recorded as a prepayment or asset on your books. You will only recognise it as an expense as the benefit is received over time.

Prepayments are part of accrual accounting; see our earlier article on cash vs accrual accounting and the matching principle. Accrual accounting, which most Australian not-for-profits employ, means recording expenses when they are incurred, not necessarily when paid. The matching principle dictates that expenses be recognised in the period they benefit.

Recording a payment as a prepayment ensures your Profit & Loss statement reflects the actual costs of each period. For example, if your financial year ends 30 June and you pay a 12-month insurance policy on 1 April, only the April–June portion should be expensed in the current year. From July onward, the balance is recorded as a prepayment on 30 June and will be expensed next year. This way, the current year’s expenses aren’t over-inflated by costs that belong in next year, and you get a fairer view of the year’s performance.

This approach is standard practice because it improves accuracy and transparency. It ensures that your reports show the actual period costs without distortions from upfront payments, information that board members, donors, and funding bodies will appreciate.

Correctly accounting for prepayments directly impacts two key financial statements: the Balance Sheet and the Profit & Loss (P&L).

• Balance Sheet: A prepayment appears on your balance sheet as a current asset or prepaid expense. It represents services you’ve paid for but have not yet received. Prepayments increase current assets on paper but simultaneously reduce your cash. You’ve effectively swapped cash for the right to a future service.
• Profit & Loss: The expense hits your P&L only when the service is provided or as time passes. This means you spread the cost over the benefit period instead of expensing it all up front. For example, a one-year service paid in advance might be expensed in twelve monthly portions. This way, your P&L remains accurate, and a large one-off payment doesn’t skew your monthly or annual surplus/deficit.

Prepayments are an essential part of accrual accounting for charities and not-for-profits. They may sound technical, but the concept is straightforward; it simply means allocating expenses to the period they belong to. Doing so gives you a clearer picture of your organisation’s financial health and ensures your reports reflect reality. Your balance sheet will show the resources paid for future use, prepaid assets, and your profit and loss will include only the costs for services used in that period. The proper timing of expenses improves budgeting, planning, and transparency for your stakeholders.

Managing prepayments requires some bookkeeping effort, tracking what you’ve prepaid, and releasing expenses appropriately, but it leads to more reliable financial statements. It prevents big upfront payments from distorting your results and helps you confidently explain your finances. Handling prepayments correctly is part of strong financial management and demonstrates good stewardship of your organisation’s funds.

At Accounting For Good, we work with NFP organisations with a turnover of $1M or more.

Contact us if your organisation needs expert financial guidance. Let us handle your accounting needs so you can focus on what matters most: serving your community and driving positive change.