How to account for prepayments in Xero (with examples)

A prepayment is a cost you've paid for but haven't yet used. Think of an annual insurance premium paid in January: you've spent the cash, but the benefit is consumed across all twelve months. Accounting standards (and good practice) say the expense should hit your profit & loss in the months the benefit is actually received — not all at once.

Why prepayments matter

If you expense the whole £1,200 insurance bill in January, that month looks artificially expensive and the rest of the year looks artificially cheap. Prepayments spread the cost so each month carries its fair share — giving you a clean, comparable monthly P&L.

The manual method in Xero

Say you pay £1,200 for 12 months of insurance on 1 January.

1. Post the bill as normal. When you enter the supplier bill, code the full £1,200 to a prepayment (balance sheet) account rather than straight to the insurance expense — for example account 1240 Prepayments.
2. Create a monthly release journal. Each month, post a manual journal that moves £100 out of the prepayment account and into the P&L:
   • Debit Insurance expense £100
   • Credit 1240 Prepayments £100
3. Repeat for 12 months. By December the prepayment balance is zero and the full £1,200 has flowed through the P&L evenly.

Worked example

The opening balance each month, less the release, equals the closing balance — and it should always reconcile to what Xero shows on the prepayment nominal code.

The catch

Doing this by hand is fine for one prepayment. Multiply it across dozens of prepaid subscriptions, licences, insurances and rents — across several client entities — and it becomes a monthly spreadsheet-and-journal marathon that's easy to get wrong.

The faster way

WorkWithLottie connects directly to Xero, reads every line posted to your prepayment codes, and builds the release schedule automatically. It posts the monthly journals for you (or holds them for approval), keeps a live register, and reconciles the balance back to Xero — so prepayments look after themselves.

Prepayments should be one of the easiest parts of month-end. With the right automation, they are.