A prepayment is any payment that is made before its due date.
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Use of Prepayments
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Use of Prepayments
- Individuals can settle future tax obligations with prepayments.
- Individuals can pay for credit card charges in advance of their due date.
- Individuals can prepay past debt before its due date by refinancing that debt.
Why are prepayments used?
A borrower can usually make intermittent extra payments of the principal without penalty. A prepayment might be made for the entire balance of a liability or it could be a partial payment of a larger loan that is made in advance of the due date.
When can I use prepayment account?
To avoid the expense of tracking too many items, prepayment accounting should only be used if a prepayment exceeds a certain minimum threshold amount; all other expenditures should be charged to expense, even if they have not yet been consumed.
