Overview
Castaway makes it straightforward to model prepayments and accruals of income and expenses by adjusting the invoice method on any Sales or Cost element. When a prepaid or accrued invoice method is selected, Castaway automatically creates a corresponding Partner Element on the balance sheet that maintains a 1:1 relationship with the P&L element, updating the prepayment or accrual balance automatically.
If your GL includes prepayment / accrual codes for these specific sales / cost lines, map them to the corresponding lines under the Accruals and Prepayments header on the balance sheet. Refer to: Mapping: Assets and Mapping: Liabilities
Prepayments vs Accruals
| Prepayment | Accrual | |
|---|---|---|
| What it represents | An expense paid or income received before the period it relates to | An expense incurred or income earned before the invoice is raised or cash received |
| Balance sheet position | Asset (prepaid expense) or Liability (income received in advance) | Liability (accrued expense) or Asset (accrued income) |
| Common examples | Insurance paid annually in advance, rent paid quarterly in advance | Wages accrued at month end, revenue earned but not yet invoiced |
Invoice Method Options
The invoice method is the key setting that controls how prepayments and accruals are modelled. The following options are available on Sales and Cost elements:
| Invoice Method | How it Works |
|---|---|
| Periodic Prepaid/Accrued | Automatically calculates invoices based on a known and consistent invoicing cycle. Best suited where invoice timing is regular and predictable. |
| Enter Days Prepaid/Accrued | Manual entry of the number of days that have been prepaid or accrued. |
| Enter Prepaid/Accrued Balance | Manual entry of the forecasted prepayment or accrual balance, exclusive of taxes. |
Worked Example: Expense Prepayment
The example below uses a Cost element to illustrate an expense prepayment, but the principle is identical for Sales elements. To model prepaid or accrued income, start with a Sales element and follow the same steps.
Assumptions: Expense Prepayment
This example models an expense prepayment with the following assumptions:
- P&L expenses of $5,000 per month
- Invoices received quarterly in advance in March, June, September and December
- Invoices are paid the month after receipt - for example, the September invoice is paid in October
Steps
- Create a Cost element in the Castaway chart of accounts.
- Click the element name to open the Element Data Entry screen.
- Under Invoice, set the Invoice Method to Periodic Prepaid.
- Set the Invoice Cycle to 3 months.
- Set the Cycle End Month to September.
- Enter $5,000 per month in the Enter Expense line.
- Leave Days Credit at the default value of 30 days.
Based on these settings, Castaway calculates an invoice every third month including taxes, and pays each invoice the following month. The corresponding prepayment balance is automatically maintained in the partner element on the balance sheet.
- Review the P&L, Balance Sheet and Cash Flow Statement to confirm the numbers appear as expected.
If you need any assistance please contact our support team at: support@castawayforecasting.com