Prepaids & Amortization

Department: Finance & Accounting Process Owner: Senior Accountant Last Updated: January 2026

1. Overview and Purpose

Objective: To define procedures for identifying, recording, and amortizing prepaid expenses and prepaid insurance across the fiscal year. This ensures that expenses are properly matched to the periods they benefit and that the general ledger accurately reflects asset and expense balances.

2. Scope

This SOP applies to:

• Non-payroll prepaid expenses (e.g., software, memberships, annual services)
• Prepaid insurance premiums (liability, D & O, property)
• Monthly amortization entries into the accounting system
• Reconciliation of prepaid balances during month-end close

3. Step-by-Step Process

3.1 Identify and Record New Prepaid Items

• During accounts payable review and bill processing, flag expenses covering more than one month
• If invoice covers multiple months, reclassify from expense to prepaid:
  • Debit: Prepaid Expenses or Prepaid Insurance
  • Credit: Expense account originally used
• Use a prepaid tracker spreadsheet to log vendor, total amount, start / end dates, and monthly amortization
• Save copy of invoice and tracker in the organization's document management system

Reviewer / Back-up: AP Specialist

3.2 Post Monthly Amortization Entries

• At month-end:
  • Open prepaid tracker
  • For each active prepaid, calculate monthly expense
  • Create journal entry in accounting system:
    • Debit: Expense account (e.g., Insurance, Dues)
    • Credit: Prepaid balance account
  • Use memo line to describe period (e.g., "Jan Amortization – Software License 2025")
  • Use a consistent posting date convention for all monthly amortization entries (e.g., last day of month) to ensure period alignment and simplify reconciliation
  • Attach journal entry to backup (tracker + invoice)

Reviewer / Back-up: Accounting Coordinator

3.3 Reconcile Prepaid Balances

• At each close, export accounting system trial balance and verify:
  • Remaining prepaid balances tie to tracker
  • Ending dates align with expected term
  • Any fully amortized items have $0 balance and are closed
  • Investigate discrepancies (e.g., double-posting, incorrect general ledger account)
  • Add reconciliation notes to tracker file

Reviewer / Back-up: Senior Accountant

3.4 Close Out Fully Amortized Items

• When prepaid is fully amortized (end date reached):
  • Confirm $0 balance in prepaid general ledger account
  • Mark line as "Closed" in tracker
  • Move invoice / support to "Archived Prepaids" folder in document management system
  • Review with Controller or Finance Director as part of quarterly review

Reviewer / Back-up: Accounting Coordinator

4. Key Roles and Responsibilities

5. Key Files and Systems

• General Ledger – Entry and tracking of prepaid balances
• Prepaid Tracker (Excel) – Core amortization schedule and GL tie-out. Organizations should maintain a single standardized tracker format for all prepaid items (both expenses and insurance) to ensure consistency in tracking and reconciliation.
• Document Management System – Storage of invoices, journal entries, support files
• Invoice PDFs – Source documentation for all prepaids
• Monthly Close Checklist – Includes prepaid reconciliation task

6. Exceptions and Special Cases

• Unclear Expense Periods: If invoice lacks coverage dates, confirm with vendor or defer classification
• One-Time Payments (≤ 2 months): May be expensed immediately with documentation
• Refunded Prepaids: Reverse remaining balance via journal entry and reduce expense accordingly
• Insurance Premiums with Installments: Treat each installment as standalone unless full-year coverage is clear

7. Risk and Control Summary