Prepaid Expenses: Key Considerations for Year-End Closing

As you begin to make plans for FY26, you may pay invoices prior to June 30, 2025 that should be recorded as an expense in FY26. Therefore, we are going to review prepaid expenses and how you must handle accounting for these.

A prepaid is an amount paid by the University for a future expense that has been paid in advance. In other words, prepaid expenses are costs that have been paid in one fiscal year (ex., FY25) but the goods or services will not be received until the following fiscal year (ex., FY26). The University is required to record prepaids as part of the year-end close process, so these amounts are properly reported and disclosed (as required) in accordance with Generally Accepted Accounting Principles (GAAP) and Governmental Accounting Standards (GASB). This ensures that these costs are accurately reflected on the University’s external annual financial statements.

Each person that processes financial transactions at fiscal yearend is responsible for making sure those expenses are both paid in the correct fiscal year and recorded properly as an expense or prepaid expense.

The following guidelines have been put into place to ensure that prepaids are consistently treated and recorded in our financial system across the University:

• Identify Eligible Prepaid Expenses - A prepaid expense occurs when a payment is made in advance for goods or services that will be received in a future accounting period (i.e., FY26). Common examples include but are not limited to:
  • Software licenses
  • Subscriptions
  • Service contracts
  • Conference or training fees
  • Insurance premiums
• Amount Matters - For prepaids, the calculated value to be moved to FY26 must be greater than $25,000
• Timing Is Critical - Only payments made before June 30, 2025, for goods/services that will be used on or after July 1, 2025, qualify as prepaid expenses for FY26.
• Split the Expense if Needed – If a payment covers periods that spon both FY25 and FY26, allocate the cost between the two fiscal years based on the coverage dates.
  • Example: A subscription paid on may 1, 2025, covering May through October 2025 should be split between FY25 (May-June) and FY26 (July-October).
• Use the Correct Account Code - When recording a prepaid expense, use the correct prepaid expense object code – 150010 PREPAID EXPENSE rather than a regular expense object code. This ensures the expense is recognized in the correct period.
• Document the Details - Maintain supporting documentation, including the allocation calculation (if split between fiscal years) in case it is needed for audit.

Here are some common examples of prepaid invoices to help you understand how you should record them at the fiscal yearend:

Example 1: Deposits or Payment of Equipment/Goods â€“ paid or partially paid (i.e., deposit paid) in FY25 but »¨¼¾´«Ã½ does not take possession of the equipment/goods until FY26. The full amount paid in FY25 would be a prepaid.
Example 2: Membership, Maintenance, or Service Contracts â€“ paid in FY25 for FY26 periods, e.g., an invoice for membership, maintenance, or service contracts with dates of 7/1/25-6/30/26 that may require early payment and is paid on 6/15/25. The full amount paid on 6/15/25 would be a prepaid.
Example 3: Memberships, Maintenance, or Service Contracts â€“ paid in FY25 for periods that cross the fiscal year end, e.g., an invoice for membership, maintenance, or service contract with dates of 4/1/25-3/31/26 is paid on 4/1/25. The calculated amount of the membership or maintenance contract for 7/1/25-3/31/26 would be a prepaid.
Example 4: Travel â€“ Flights, hotel reservations, conference registrations, etc. paid in FY25 for travel not occurring until FY26 would be a prepaid.
Example 5: Services - paid in FY25 for services not occurring until FY26, e.g., an invoice for consulting services dated 7/1/25 – 7/31/25, or DJ services scheduled for dated 7/4/25, but paid prior to 6/30/25 would be a prepaid.
Example 6: Leases â€“ paid in FY25 for lease period of 7/1/25 – 7/31/25 would be a prepaid.

Finance will review invoices exceeding $25,000 as a pre-audit for yearend close to ensure that departments have properly recorded the expense in the correct year. If General Accounting determines that the expense is not properly reported in the correct fiscal year, a JET entry will be completed to correct it so it is reflected properly in the University’s external financial statements.

Questions?

If you're unsure how to classify or record a transaction as prepaid, please contact Kris Sano at sanok@ohio.edu to have your questions answered or discuss any possible prepaid entries needed.