Prepaid Expense Narrative

The Prepaid Expense process consists of the following activities: Initiation & Recording Monthly Reconciliation Process Monthly Variance Analysis Budget versus Actual

Initiation & Recording The Finance Analyst (Finance Department) receives the Invoices for expenses. If the invoice relates to future goods/ services to be received (determined based on review of the invoice details and supporting Purchase Order), that invoice would be coded to the prepaid expense account (R_PDO_9, R_PDO_2). At each month end, a prepaid expense schedule is prepared in Excel by the Senior Accountant. Items from prior months are carried forward and new prepaid expenses in ERP application are added. For new prepaid expenses, the service period is determined by looking at the service period on the invoice (R_PDO_8). If the invoice does not clearly state the service period, the person who made the purchase is inquired as to what the service period should be. The related service periods are included in this schedule, which is utilized to calculate the current-month amortization expense. Such expense(s) is then coded to the appropriate departments based on the origination of the expense(s). Prior to recording the amortization journal entries, the Finance Senior Accountant prepares Prepaid Expense Amortization Schedules for all recorded prepaid expenses, including preparing supporting documentation for the amortization period and methodology (R_PDO_10, R_PDO_11). The Finance Manager reviews and approves Prepaid Expense Amortization Schedules for completeness and accuracy and supporting documentation before recording amortization journal entries. The Finance Senior Accountant prepares journal entries to record prepaid expenses, including supporting documentation (R_PDO_1). The Finance Manager reviews the journal entries and supporting documentation to record prepayments (C_PDO_1, R_PDO_3). Monthly Reconciliation Process On a monthly basis, the Finance Senior Accountant reconciles prepaid expenses to the general ledger. The Finance Manager reviews the reconciliation, including supporting documentation (Prepaid Expense Amortization Schedule). Reconciling items are investigated and resolved on a timely basis (C_PDO_3, R_PDO_7). When reconciling prepaids, there should be no discrepancies as the information in ERP application is the same information utilized to create the prepaid schedules. In the event that the is a reconciling discrepancy, it would be related to improper allocation or classification between departments, and the finance department would run a filter by department to determine if an item was erroneously expensed. The schedule serves as the support for the amount in the GL and must always agree.

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Note: This document is an illustrative example and is for information and education purposes only. It is not a substitute for professional advice, services, nor an entitys own internal control procedures and should not be used or relied on as such.

Monthly Variance Analysis Actual versus Budget On a monthly basis, the Accounting Manager runs a departmental expense report to compare currentmonth prepaid expenses to the budgeted expenses for that month. An analysis is prepared (Prior Period versus Budget versus Actual) and variances are calculated. Variances greater than $10K USD and/or 10% are sent out to each department manager as well as to the Senior Accountants in the finance department to compile explanations. Each variance exceeding the mentioned thresholds requires an explanation to be part of the report. The complete analysis with comments related to the variances are discussed at a monthly meeting and reviewed by the Assistant Controller. Any issues arising from this analysis (i.e., an expenditure with future benefit recorded as an expense in the current period instead of deferring it to the next period) are resolved as part of these discussions (R_PDO_4, C_PDO_2). On a monthly basis, the Assistant Controller reviews the analysis and journal entry before signing off and posting the entry. Using his knowledge of the vendors, and coding for prepaids, the Assistant Controller reviews each line on the journal entry, department allocations, ensures there are no credit balances, checks for zero balances, and checks formulas and subtotals. Further, the Assistant Controller also checks the start and end dates, and the calculations related to those dates (C_PDI_9, R_PDO_5, R_PDO_3, R_PDO_7, R_PDI_15). Any discrepancies identified are investigated and resolved. IPE: PDO_IPE_1 Prepaid Expense Amortization Schedule PDO_IPE_2 Departmental Expense Report
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Note: This document is an illustrative example and is for information and education purposes only. It is not a substitute for professional advice, services, nor an entitys own internal control procedures and should not be used or relied on as such.