Xero Advisor Certificate Practice Test

Prepayments are cash outflows for goods or services you will receive in the future, so they sit as an asset until the benefit is received. In Xero, handle this by recording the payment to a prepayment asset (you can use a dedicated Prepayments asset account) or by using Spend Money to that asset. When the service or product is actually received and you incur the expense or the invoice arrives, apply the prepayment against that invoice or expense, moving the amount from the asset to the expense. This matches the cost to the period in which the benefit is received and keeps the balance sheet correct. Recording the payment as income is inappropriate, and recording it as a prepayment expense would treat it as an immediate cost rather than an asset. Simply spending money without linking it to a prepayment asset wouldn’t maintain the proper asset balance.