How to set up prepayment transactions in the Financial Plan

Nori -

(This article is for Xero users only)

Sometimes you pay a one-year subscription in advance, say a subscription fee 120GBP+VAT, and its cost of 10GBP in P/L (Profit & Loss) is allocated for each month for a year. Or, the other way around, you receive money from customers as prepayment and allocate it with coming invoice issue.

If you are already using this accounting technique, you can set up the cash flow plan in CaFE's Financial Plan ("Financial Plan" hereafter), using our Prepayment setting as below.

For wages related deduction items, such as health insurance, please go here.

 

[General Prepayment Setting]

1. Set up a B/S budget item for prepayment

Your prepayment item has to be recognised as a Prepayments in CaFE to work properly.

To set up the plan item category of the item, go to Financial Plan -> Budget -> Balance Sheet, and click the edit icon on the target item. If you cannot find the target item in the B/S budget, click Add budget items and add the item to the budget first.

If the Current Plan Item Category shows any other category than "Prepayments", click the Change Plan Item Category, then select Prepayments from the list and click Save.

PrepaymentAccountCategorySetting1.PNG

PrepaymentAccountCategorySetting2.PNG

 

2. Set up a P/L budget item for allocation

This budget item is for allocating a prepayment amount on a monthly basis.

To set up allocated amounts on a budget item, go to Financial Plan -> Budget -> Profit and Loss, and click the edit icon on the target item. If you cannot find the target item in the P/L Budget, click Add budget items and add the item to the budget first.

For example, if you allocate a subscription fee 120GBP billed annually (Prepayment item in B/S) to 10GBP each month as a monthly expense (Expense item in P/L), you can enter 10 to each month of this budget here.

PLExpenseAccountSetting.png

 

3. Set up a cash flow plan for prepayments

This set up is to let CaFE know how to create cash flows for prepayments.

To set up this, go to Financial Plan -> Cash Flow, and click the gear icon on the P/L item, then go to the Prepayment tab. If you cannot find the item in the Cash Flow plan, click Add cash flow plan items and add the item to the plan.

For example, the setting below tells the followings.

  • Any prepaid amounts for this item should be accounted on "Prepaid expenses for software" (Set up in step 1 above)
  • A subscription fee is billed on the 10th of April, every year
  • The monthly expense allocation starts in the same month as the billing date, April in this case

PrepaymentCashFlowSetting.PNG

For more information, please refer to the help text on the screen.

 

4. Recalculate the financial plan

To reflect the settings in the current financial plan, click Recalculate Plan.

In the Cash Flow plan, a payment for the annual subscription fee occurs in April 2019 with VAT amount (in this example, 20%, but you can change it in the Basic tab in step 3 above).

PrepaidExpenseCFPlan.png

In the B/S budget, the prepayment item shows that 10 is allocated from its balance each month, starting from April 2019.

PrepaymentBSBudget.png

 

[Monitoring Cash Flows]

To monitor the actual performance, you need to Authorise the Financial Plan.

AuthorisePlan.png

Here is one technique to track actual cash flows for prepayments accurately.

When creating an actual payment transaction in your accounting system, set Code of the P/L item (can be found in the Chart of Accounts) inside the Description field of a line item for the prepayment account specified in step 3.

SpendMoneyWithPrepaymentInXero.PNG

CodeInChartOfAccounts.png

 

Then CaFE can link the payment to the appropriate item in the cash flow plan when synchronising data.

MonitoringPrepayment.png

 

 

[Prepayment Setting for Wages Deduction Items]

Let's say, you pay for the company health insurance for the next 12 months in advance, and it is allocated for each wage payment to employees.

 

1. Set up a B/S budget item for prepayment

This is the same step as the General Prepayment Setting. Please see here.

 

2. Set up a wages deduction

In this scenario, please go to Financial Plan -> Cash Flow -> Overall Net Wages and click the gear icon.

In the Other Deductions in B/S, please select the prepayment account set up in step 1 and click Save.

Then enter the percentage of deduction amount on each wage payment and click Save. The example below shows 10% of each wage payment is allocated from the prepayment account (Prepayments in the example below) on a monthly basis.

Please note that the current Financial Plan supports % setting only.

WagesDeductionSetting.PNG

3. Set up a cash flow plan for prepayments

This step is similar to step 3 in General Prepayment Setting, it is to let CaFE know how to create cash flows for prepayments.

Go to Financial Plan -> Cash Flow and click the gear icon on the prepayment account under PayE/NI/else. If you don't find the account, click Add cash flow plan items and add the account to the cash flow plan.

PrepaymentSettingForPrepayments.png

In the Basic tab, select Closing Period to Prepayment, then the Prepayment tab appears as below.

For example, the setting below tells the followings.

  • A health insurance fee is billed on the 20th of June, every year
  • Allocation for wages start in the next month of the billing date, July in this example
  • Payment for the health insurance occurs on the same day of the billing date, the 20th of June in this example.

PrepaymentSettingForPrepayments2.png

For more information, please refer to the help text on the screen.

 

4. Recalculate the financial plan

To reflect the settings in the current financial plan, click Recalculate Plan.

In this example, the monthly budget for Direct Wages is 5,000 in the P/L budget.

BudgetForDirectWages.PNG

In the Cash Flow Plan, a payment for the health insurance, which is 500 (10% of the monthly wage 5,000) multiplied by 12 (for a year), is now planned.

ParepaymentsCFPlan.png

In the B/S budget, the June's balance for Prepayments now shows 6,000, then 500 is allocated for wages on a monthly basis from July (the next month of accrue).

PrepaymentsAfterCalc.PNG

Please note that the balances before June 2019 are the remaining balances for the previous year. CaFE assumes the same settings apply to the previous year.

 

[Current limitation]

  • Prepayment setting is not available for Overall Net Wages, and Corporation Tax.
  • VAT accrual is calculated upon prepayment accrual
  • Contact base budget is not yet available (coming soon!)

 

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