If it is purchase with VAT, prepayment should include VAT and it should go to unrealized VAT account when posting prepayment invoice. If it is purchase without VAT, prepayment should not include any VAT.

Is prepaid tax a prepayment?

Prepaid income tax is a form of prepaid expense. The most common reason why prepayment on income taxes occurs is due to over-estimation of tax deposits. In this situation, taxes are estimated from the financial records of the previous year. These estimated taxes are paid.

How do you account for prepayments?

Accounting for Prepayments

From the perspective of the buyer, a prepayment is recorded as a debit to the prepaid expenses account and a credit to the cash account. When the prepaid item is eventually consumed, a relevant expense account is debited and the prepaid expenses account is credited.