To post prepaid insurance in SAP, debit the prepaid expense account and credit cash. Run a recurring document every month to amortize its cost over 12 months.
Alternately, you can utilize SAP’s accrual engine to record prepaid expenses in sap. Both methods produce accurate financial statements; however, each has some unique differences that should be kept in mind when making decisions based on these statements.
Accounts Receivable
Prepaid expenses refer to any payments that you make upfront but won’t use until later, such as services or products you will only use later on. They can be recorded using either recurring documents or the accrual engine.
The Recurring Document Method requires making one entry at the end of every accounting period. For instance, if you pay your rent upfront and use it throughout the year, creating a recurring journal entry to post an amount each month will increase Prepaid Rent expense account and decrease Cash account respectively.
The accrual engine method allows you to record expenses or revenues on an incremental basis rather than directly accounting for them in current period terms. SAP Business ByDesign utilizes this approach for recording supplier invoices and costs; to do this you must set up individual accounts for main categories like assets, expenses and income and make use of debits/credits – for instance if recording an upcoming purchase worth $12,000 that you would debit the Prepaid Rent expense account while crediting Cash account.
Accounts Payable
Prepaid expenses are recorded in an accounts payable ledger as an expense account and cash as current assets of a firm, adjusted each month according to how much insurance has been consumed. They can either be handled manually or through journal entry vouchers.
SAP CC’s rating and charging system sends Billing in Contract Accounts Receivable and Payable data records with detailed information on every service charged against prepaid allotments to Billable Item for billing in Contract Accounts Receivable and Payable. Each billable item includes data about consumption of services consumed, tax specifications and an account reference that will be debited when billing occurs.
General Ledger
A company’s general ledger serves as its financial record keeper and helps users easily identify where the company is spending and earning money. Also referred to as its Chart of Accounts (CoA), its purpose is to replace filing cabinets stuffed with indexes of paper index cards with an overview of financial transactions made easier for accountants, users and analysts to quickly locate and interpret data.
Insurance companies rely on a general ledger to track all their incoming and outgoing payments and report profit in their financial statements. But sometimes business transactions don’t fall within a fiscal year or period assigned for accounting, necessitating accrual accounting – something SAP’s recurring document engine helps achieve.
Property and casualty insurers recognize commission income related to policy acquisition costs in their general ledger, but GAAP requires these expenses be capitalized and amortized over the life of each policy. Under statutory APP Manual rules, this commission income may be recognized immediately regardless of whether these exceed policy acquisition costs incurred.
Other differences between SAP and GAAP accounting practices involve how surplus notes are treated: while GAAP requires them to be classified as debt instruments, SAP classifies them as assets on its balance sheet and only reports interest as liabilities when approved by state insurance commissioners.
Payroll
Prepaid expenses refer to any expense paid in advance but which must be recorded later for accounting purposes because it relates to an entirely different fiscal year/period. SAP Business By Design’s cloud ERP solution offers users the capability to record these amounts either manually or automatically using its journal entry voucher feature.
For recording prepaid expenses, first create a document with debit and credit entries, assign this recurring journal to the period that it should appear, and post this transaction into your Fi books.
SAP CC sends data records of each service consumed to Billing in Contract Accounts Receivable and Payable, including refillable units consumed, tax specifications, and the current prepaid credit balance status.