Prepayments cover payments received from debtors or payments made to creditors before due date.
Thus, if rent is paid for three months in advance on 31st December, the date to which accounts were made up, it is necessary to remove the charge of three months rent from the Rent Payable Account and to show the amount paid in advance as an asset or debtor of the business. Telephone rental and insurance premiums are other common examples of charge which are paid in advance.

Conversely, the business may have received a periodic payment in advance of the due date, and in such a case the credit should be removed from the income account and also be shown as a liability of the business.

In a small business prepayments of both kinds may be included in the Suspense Creditors and Suspense Debtors Accounts mentioned above, provided that the items so included are clearly set out in a schedule to the accounts. In any accounting system where the adjustments are numerous it will be found convenient to open separate suspense accounts for prepayments. In many large concerns prepayments are shown as separate items in the Balance Sheet.